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TICE 471 (DO NOT DELETE) 10/18/2012 9:19 PM

51

BANKRUPTCY LAW

The Honorable Douglas O. Tice, Jr. *

K. Elizabeth Sieg **

David W. Gaffey ***

I. INTRODUCTION

This article continues the survey of bankruptcy and insolvency

case law that was initiated in November 2009.1 The article covers

both consumer and business bankruptcy issues and is restricted

primarily to decisions published by courts in the Fourth Circuit

and the Supreme Court of the United States since the 2009 arti-

cle. It is the desire of the authors to provide an interesting sam-

pling of the most common issues from the bankruptcy and insol-

vency field. Perhaps the most significant decision of all, and

certainly the most discussed during the past year, is the Supreme

Court’s 2011 ruling in Stern v. Marshall limiting the authority of

bankruptcy judges to enter final orders involving issues arising

under state law.2 The full impact of Stern both nationally and in

the Fourth Circuit remains to be seen. However, the authors be-

lieve most matters of bankruptcy administration will continue to

be carried out by the bankruptcy courts with little impact from

Stern. It is the authors’ goal to provide practitioners with a useful

tool for research in the various areas covered in the article.

* Chief Judge, United States Bankruptcy Court, Eastern District of Virginia, Rich-

mond, Virginia. J.D., 1957, University of North Carolina at Chapel Hill School of Law;

B.S., 1955, University of North Carolina at Chapel Hill.

** Associate, McGuireWoods LLP, Richmond, Virginia. J.D., 2008, University of

Richmond School of Law; B.S., 2004, Georgia Institute of Technology. Former Law Clerk

to the Honorable Kevin R. Huennekens, United States Bankruptcy Court, Eastern District

of Virginia, Richmond, Virginia, 2008–09.

*** Associate, Whiteford Taylor & Preston LLP, Falls Church, Virginia. J.D., 2010,

George Washington University Law School; B.A., 2006, Duke University. Former Law

Clerk to the Honorable Kevin R. Huennekens, United States Bankruptcy Court, Eastern

District of Virginia, Richmond, Virginia, 2011–12.

1. Hon. Douglas O. Tice, Jr., Suzanne E. Wade & K. Elizabeth Sieg, Annual Survey

of Virginia Law: Bankruptcy Law, 44 U. RICH. L. REV. 201 (2009).

2. 564 U.S. ___, ___, 131 S. Ct. 2594, 2620 (2011).


52 UNIVERSITY OF RICHMOND LAW REVIEW [Vol. 47:51

II. ABSOLUTE PRIORITY

An issue that appears destined for the Supreme Court is

whether the 2005 Bankruptcy Abuse Prevention and Consumer

Protection Act (“BAPCPA”) amendments to the Bankruptcy Code

abrogated the absolute priority rule for individual debtors in

Chapter 11, as courts across the country have reached opposite

but equally plausible conclusions via a multitude of different ra-

tionales and arguments. The Fourth Circuit recently became the

first court of appeals to address the issue in the case of In re Ma-

haraj.3 Acknowledging that the language of the BAPCPA is am-

biguous, the court analyzed the history of the absolute priority

rule and the legislative history of the BAPCPA, and concluded

that Congress did not intend to repeal the absolute priority rule

in individual Chapter 11 cases.4

The debtors, Ganess and Vena Maharaj, were the owners and

operators of an auto body repair shop in Chantilly, Virginia.5 Af-

ter falling victim to an apparent fraud that saddled them with

considerable debt, the debtors filed a voluntary petition for relief

under Chapter 11 of the Bankruptcy Code, as their debts exceed-

ed the limits for proceeding under Chapter 13.6 The debtors’

Chapter 11 plan of reorganization proposed that the debtors

“would continue to own and operate their auto body business and

use income from the business to pay” their creditors.7 After one

class of general unsecured creditors voted to reject the plan, the

debtors attempted to “cram down” the plan over the unsecured

creditors’ objection under 11 U.S.C. § 1129(b), arguing that the

absolute priority rule no longer applied to individual Chapter 11

debtors and that the debtors could permissibly retain their own-

ership interest in the business.8 The bankruptcy court disagreed,

however, and denied confirmation of the debtors’ plan.9

Prior to the BAPCPA amendments in 2005, there was no doubt

that the absolute priority rule applied to individual Chapter 11

debtors. Section 1129(b)(2)(B)(ii) stated that in order to be fair

3. 681 F.3d 558, 560 (4th Cir. 2012).

4. See id. at 575.

5. Id. at 566.

6. Id.

7. Id. at 567.

8. See id.

9. See id.


2012] BANKRUPTCY LAW 53

and equitable, a plan must provide that “the holder of any claim

or interest that is junior to the claims of such [dissenting] class

will not receive or retain under the plan on account of such junior

claim or interest any property . . . .”10

Post-BAPCPA, § 1129(b)

(2)(B)(ii) now states that, to be fair and equitable, a plan must

provide that

the holder of any claim or interest that is junior to the claims of such

[dissenting] class will not receive or retain under the plan on account

of such junior claim or interest any property, except that in a case in

which the debtor is an individual, the debtor may retain property in-

cluded in the estate under section 1115, subject to the requirements of

subsection (a)(4) of [§ 1129].11

Section 1115, which was added to the Bankruptcy Code by the

BAPCPA,12

in turn provides:

(a) In a case in which the debtor is an individual, property of the es-

tate includes, in addition to the property specified in section 541—

(1) all property of the kind specified in section 541 that the

debtor acquires after the commencement of the case but before

the case is closed, dismissed, or converted to a case under

chapter 7, 12, or 13, whichever occurs first; and

(2) earnings from services performed by the debtor after the

commencement of the case but before the case is closed, dis-

missed, or converted to a case under chapter 7, 12, or 13,

whichever occurs first.13

The court then discussed the split of authority that has devel-

oped across the country in response to these amendments. Courts

adopting the “broad view” of the BAPCPA amendments have

found that by including in § 1129(b)(2)(B)(ii) a cross-reference to

§ 1115, which references § 541 defining property of the bankrupt-

cy estate, Congress intended to authorize an individual Chapter

11 debtor to retain all property of the estate and therefore effec-

tively abrogated the absolute priority rule.14

Courts adopting the

“narrow view,” however, have found “that Congress did not intend

such a sweeping change to” the Bankruptcy Code and have held

that the BAPCPA amendments only permit an individual Chap-

10. Id. at 562 (quoting 11 U.S.C. § 1129(b)(2)(B)(ii) (2006)) (internal quotation marks

omitted).

11. 11 U.S.C. § 1129(b)(2)(B)(ii) (emphasis added).

12. Bankruptcy Abuse Prevention and Consumer Protection Act, Pub. L. No. 109-8, §

321, 119 Stat. 23, 94–95 (2005) (codified as amended at 11 U.S.C. § 1115 (2006)).

13. 11 U.S.C. § 1115.

14. In re Maharaj, 681 F.3d at 563.



ter 11 debtor “to retain property and earnings acquired after the

commencement of the case.”15

In In re Maharaj, the Fourth Circuit began its analysis by find-

ing that the language of the statute was ambiguous and that both

the broad and narrow interpretations of the BAPCPA amend-

ments espoused plausible interpretations of congressional in-

tent.16

As such, the court then analyzed the context in which the

amendments were enacted and the broader context of the

BAPCPA.17

The court noted that prior to the BAPCPA, property of

the estate did not include post-petition earnings.18

Post-petition

property and earnings therefore could be retained by a debtor

without violating the absolute priority rule.19

As § 1115 now has

added post-petition earnings and property to the property of the

estate, revised § 1129(b)(2)(B)(ii), which exempted from the abso-

lute priority rule property added to the estate by § 1115, pre-

serves only the pre-BAPCPA status quo by permitting a debtor to

retain post-petition earnings and property.20

The court further found that the Supreme Court’s strong aver-

sion to implied repeal, especially in the bankruptcy context, sup-

ported its conclusion that the BAPCPA amendments did not ab-

rogate the absolute priority rule.21

Citing the 2010 decision in

Hamilton v. Lanning, the court stated that “courts ‘will not read

the Bankruptcy Code to erode past bankruptcy practice absent a

clear indication that Congress intended such a departure.’”22

The

court then analyzed the history of prior amendments to the

Bankruptcy Code, finding that when Congress amended the prior

Bankruptcy Act in 1952 to eliminate the “fair and equitable” re-

quirement underlying the absolute priority rule, it did so in a

clear manner and explained its actions in the accompanying legis-

lative history.23

The court concluded that “[h]istory shows that

Congress knows how to abrogate the absolute priority rule, and it

15. Id.

16. Id. at 569.

17. Id.

18. Id. (quoting In re Karlovich, 456 B.R. 677, 681 (Bankr. S.D. Cal. 2010)).

19. Id. (quoting In re Karlovich, 456 B.R. at 681).

20. Id. at 570 (quoting In re Karlovich, 456 B.R. at 681).

21. Id.

22. Id. at 571 (citing Hamilton v. Lanning, 560 U.S. ___, ___, 130 S. Ct. 2464, 2467

(2010)).

23. Id. at 572.



has not done so here.”24

Accordingly, the court held that the abso-

lute priority rule was not abolished by the BAPCPA amendments

and remains in full force in individual Chapter 11 cases.25

III. ABUSE

Section 707 of the Bankruptcy Code furnishes courts with a

powerful weapon to police perceived abuses of the bankruptcy

process by Chapter 7 debtors.26

Faced with the dismissal or con-

version of their cases, debtors understandably have sought to re-

strict the application of § 707. In the Fourth Circuit case of Cal-

houn v. United States Trustee, the debtor appealed a decision of

the bankruptcy court that a court may dismiss a case for abuse of

the provisions of 11 U.S.C. § 707(b)(3) even if a presumption of

abuse does not arise under the means test imposed by

§ 707(b)(2).27

After incurring significant debt from a home renova-

tion, followed by an unexpected decline in the balance of their in-

vestment accounts, the debtors entered into a payment plan with

a credit management company that paid their creditors $2638 per

month.28

The debtors continued this payment plan for twenty-two

months, whereupon they chose to discontinue the plan because

the budget imposed by the plan did not leave sufficient income for

unexpected expenses.29

The debtors then filed for bankruptcy un-

der Chapter 7 of the Bankruptcy Code.30

Under § 707(b)(1), as amended by the BAPCPA, a court may

dismiss “a case filed by an individual debtor under [Chapter 7]

whose debts are primarily consumer debts . . . if it finds that the

granting of relief would be an abuse of the provisions of this chap-

ter.”31

A rebuttable presumption of abuse arises under § 707(b)(2)

if the debtor’s income exceeds the highest median family income

of the applicable state for the debtor’s family size and the debtor’s

income and expenses do not satisfy the “means test,” a complex

formula that takes into account the debtor’s income and certain

24. Id. at 573.

25. Id. at 574.

26. See 11 U.S.C. § 707(b) (2006 & Supp. IV 2010).

27. 650 F.3d 338, 341–42 (4th Cir. 2011).

28. Id. at 340.

29. Id.

30. Id.

31. 11 U.S.C. § 707(b)(1).



deductible expenses.32

Section 707(b)(3) also permits a court to

dismiss a case for abuse if the debtor filed the petition in bad

faith or if the “totality of the circumstances . . . of the debtor’s fi-

nancial situation demonstrates abuse.”33

For purposes of the means test under § 707(b)(2), the debtors

received $7313 in monthly income, excluding Social Security in-

come, and were eligible for $7330.19 in monthly deductions.34

Alt-

hough the debtors exceeded the relevant highest median family

income, the debtors’ expenses, when subtracted from their in-

come, left a net monthly income that did not give rise to a pre-

sumption of abuse under § 707(b)(2).35

The bankruptcy court,

however, dismissed the debtors’ case under § 707(b)(3) on the

grounds that the “totality of the [debtors’] financial situation evi-

denced an abuse of Chapter 7” because there was no illness, ca-

lamity, disability, or unemployment that precipitated the debtors’

bankruptcy filing, and the debtors had the ability to repay their

debts.36

On appeal, the debtors contended, inter alia, that the means

test is conclusive of eligibility for Chapter 7 relief.37

The Fourth

Circuit rejected this argument, holding that the means test pro-

vides only a formula by which a court can presume abuse and

dismiss a case.38

As the test is not conclusive and the presumption

is rebuttable, a court still may find abuse under § 707(b)(3) even

if a presumption of abuse does not arise under the means test.39

The court then found that the bankruptcy court recited “a multi-

tude of factors weighing in favor of abuse” and found no error in

the bankruptcy court’s findings.40

Accordingly, the court affirmed

the dismissal of the debtors’ case.41

In In re Lassiter, the Bankruptcy Court for the Eastern District

of Virginia confronted the issue of whether § 707(b) of the Bank-

32. Calhoun, 650 F.3d at 340–41 (citing 11 U.S.C. § 707(b)(2), (6), (7)).

33. 11 U.S.C. § 707(b)(3)(B).

34. Calhoun, 650 F.3d at 341.

35. Id.

36. Id. at 342.

37. Id.

38. Id.

39. Id.

40. Id.

41. Id. at 339.



ruptcy Code applies to converted Chapter 7 cases.42

The debtors in

Lassiter filed a petition for relief under Chapter 13 and later con-

verted the case to Chapter 7.43

After the United States trustee

filed a statement of abuse pursuant to § 704(b)(1)(A) because the

debtors’ monthly income exceeded the limitations imposed by the

means test, the debtors filed a motion to convert the case back to

Chapter 13.44

The debtors then filed an amended motion to con-

vert, asserting “that they should not be forced to reconvert their

case” because § 707(b), which permits a bankruptcy court to con-

vert or dismiss a Chapter 7 case for “abuse of the provisions of

[Chapter 7],” does not apply to cases filed under another chapter

of the Bankruptcy Code and subsequently converted to Chapter

7.45

The court rejected this argument.46

First noting that the lan-

guage of § 707(b) is ambiguous and not susceptible to a single

clear reading, the court analyzed similar provisions in other

chapters of the Bankruptcy Code to gain insight into Congress’s

intent.47

Sections 1112(b)(1), 1208(b), and 1307(b)—all dealing

with conversion or dismissal of cases under their respective chap-

ters—include the phrase “dismiss a case under this chapter”

without the additional language present in § 707(b).48

The court

found that as these sections “permit the court to dismiss any case

pending under the respective chapter, not just cases filed under

the respective chapter,” Congress intended § 707(b) to operate in

a similar manner.49

By inserting “filed by an individual debtor” in

§ 707(b), the court concluded, Congress thereby meant only to

prevent courts from dismissing Chapter 7 cases filed by corpora-

tions or other business entities.50

42. 65 Collier Bankr. Cas. 2d (MB) 1615, 1616 (Bankr. E.D. Va. May 24, 2011).

43. Id. at 1616–17.

44. Id. at 1617.

45. Id. The language of § 707(b) at issue here states,

After notice and a hearing, the court . . . may dismiss a case filed by an indi-

vidual debtor under this chapter whose debts are primarily consumer debts,

or, with the debtor’s consent, convert such a case to a case under chapter 11

or 13 of this title, if it finds that the granting of relief would be an abuse of

the provisions of this chapter.

11 U.S.C. § 707(b)(1) (2006).

46. In re Lassiter, 65 Collier Bankr. Cas. 2d (MB) at 1618.

47. Id. at 1618, 1619, 1620 (quoting 11 U.S.C. § 707(b)(1)).

48. Id. at 1619 (citing 11 U.S.C. §§ 1112(b)(1), 1208(b), 1307(b), 707(b)(1) (2006)).

49. Id. (emphasis added).

50. Id. at 1619–20.



The court also noted that this interpretation would prevent the

creation of two classes of Chapter 7 debtors: those who file under

Chapter 7 initially and are subject to § 707(b) and those who con-

vert their case to Chapter 7 and are immune from § 707(b)’s stric-

tures.51

This result would create an avenue for those debtors una-

ble to meet the requirements of the means test to bypass the

means test altogether and enjoy the benefits of Chapter 7 simply

by filing under another chapter and later converting the case.52

Accordingly, the court held that the word “filed” as used in

§ 707(b) incorporated the conversion of cases from other chapters

of the Bankruptcy Code.53

In In re Penninger, the Schedule J filed by the debtors on the

petition date showed an income of $408 per month.54

Over the en-

suing seven months, the debtors’ income drastically increased,

prompting the United States bankruptcy administrator to file a

motion to dismiss the debtors’ case for abuse under §§ 707(b)(1)

and 707(b)(3) of the Bankruptcy Code.55

At the time of the hearing

on the administrator’s motion, the debtors’ income had risen to

$1407 per month.56

The debtors did not dispute that their income,

as of the hearing date, could provide a one hundred percent dis-

tribution to creditors and would have been abusive under § 707(b)

had the case been filed on that date.57

The debtors nevertheless opposed the administrator’s motion

on the grounds that abuse for the purposes of §§ 707(b)(1) and

707(b)(3) should be determined as of the petition date and that

subsequent changes to the debtor’s financial situation should not

be considered in the abuse analysis.58

The Bankruptcy Court for

the Middle District of North Carolina agreed with the adminis-

trator, however, holding that the plain language of § 707(b) per-

mits a court to consider a debtor’s financial circumstances at the

time of the hearing.59

According to the court, § 707(b) “focuses on

whether granting a Chapter 7 discharge would be an abuse, not

51. Id. at 1622.

52. Id. at 1623.

53. Id. at 1620.

54. No. 10-52061, 2011 WL 2709321, at *1 (Bankr. M.D.N.C. July 8, 2011).

55. Id.

56. Id.

57. Id.

58. Id. at *2.

59. See id.



whether the filing of the petition was an abuse.”60

The court also

noted that § 707(b)(3) permits a court to consider “the totality of

the circumstances . . . of the debtor’s financial situation.”61

The

court thus granted the administrator’s motion, finding that the

totality of the debtors’ financial situation constituted an abuse of

Chapter 7 under § 707(b)(3).62

IV. AVOIDANCE ACTIONS

In Goldman v. Capital City Mortgage Corp., the Chapter 7

trustee brought suit against several defendants to avoid a series

of transfers of a parcel of real estate originally owned by the

debtor.63

The initial and secondary transferees of the property en-

tered into consent orders with the trustee avoiding the transfers.64

The tertiary transferee, Capital City Mortgage Corporation

(“CCM”), a lender specializing in high-interest loans to high-risk

individuals and businesses, asserted that the transfer was not

avoidable pursuant to § 550(b)(1) as it had taken the property “for

value, . . . in good faith, and without knowledge of the voidability

of the transfer.”65

While there was no dispute that CCM had taken the property

for value, and while the court found that CCM did not have actu-

al knowledge of the voidability of the transfer, the court found

that the transfer was avoidable because CCM had not taken the

property in good faith.66

The court first reaffirmed its holding in

Smith v. Mixon that “knowledge” includes only actual notice but

clarified that the “knowledge” requirement is satisfied where a

transferee knew facts that would lead a reasonable person to be-

lieve that the transfer was recoverable.67

Although a transferee

has no duty to investigate where nothing suggests that a transfer

may be avoidable, actual knowledge of facts that would lead a

60. Id. (citing 11 U.S.C. § 707(b)(1) (2006)).

61. Id. (citing 11 U.S.C. § 707(b)(3) (2006)) (internal quotation marks omitted).

62. See id. at *3.

63. 648 F.3d 232, 233–34 (4th Cir. 2011) (per curiam).

64. Id. at 236.

65. See id. at 234, 237 (alteration in original) (citing 11 U.S.C. § 550(b)(1) (2006)).

66. Id. at 240–41.

67. Id. at 237, 238 (citing Smith v. Mixon, 788 F.2d 229, 232 (4th Cir. 1988); IRS v.

Nordic Vill., Inc. (In re Nordic Vill., Inc.), 915 F.2d 1049, 1055 (6th Cir. 1990)).



reasonable person to believe that a transfer is voidable is suffi-

cient to permit the avoidance of a mediate transfer.68

The court then addressed the good faith requirement of

§ 550(b)(1), holding that good faith must be viewed under an ob-

jective standard.69

The court held that a transferee does not act in

good faith when it has sufficient actual knowledge to put it on in-

quiry notice of the debtor’s possible insolvency or the avoidability

of a transfer.70

Reviewing the actions of CCM prior to the transfer,

the court found that, despite numerous red flags indicating that

the transfer of the property from the secondary transferee to

CCM might be fraudulent, CCM failed to verify the credentials of

the transferee, to investigate the title history of the property, or

to take any steps to ensure the legitimacy of the transfer that

would be expected of a reasonable lender in similar circumstanc-

es.71

Accordingly, the court found that CCM’s failure to investi-

gate constituted bad faith that precluded CCM from asserting

§ 550(b)(1) as a defense to the transfer.72

In Siegel v. Russellville Steel Co. (In re Circuit City Stores,

Inc.), a liquidating trustee sought, under § 547(b) of the Bank-

ruptcy Code, to avoid and recover several payments made by the

debtor within ninety days of the petition date.73

While conceding

that the transfers were preferences under § 547(b), the defendant

asserted that the payments were made in the ordinary course of

business and were therefore not avoidable pursuant to

§ 547(c)(2)(A).74

The primary issue to be decided by the court was

the relevant baseline to determine the ordinary course of business

between the debtor and the defendant.75

The trustee argued that the court should consider the entire

business relationship between the debtor and the defendant to

identify the ordinary payment practices between the parties.76

The defendant, in contrast, advanced an arbitrary and fixed

68. Id. (citations omitted).

69. Id.

70. Id. at 238 (citing Gold v. Laines (In re Laines), 352 B.R. 397, 406 (Bankr. E.D. Va.

2005)).

71. See id. at 241–42.

72. Id. at 241.

73. No. 08-35653, 2012 WL 1981781, at *1 (Bankr. E.D. Va. June 1, 2012).

74. Id. at *1, *3.

75. Id. at *3.

76. Id.



twelve-month lookback period.77

Finding that twelve-month look-

back period advocated by the defendant would unnecessarily con-

strain the court’s ability to ascertain the parties’ “ordinary”

course of conduct, the court determined that it was appropriate to

consider the entire business history between the debtor and the

defendant.78

Following the Fourth Circuit’s decision in Advo-System, Inc. v.

Maxway Corp., the court then held that the ordinary course of

business between the parties must be determined by their con-

duct prior to the onset of insolvency.79

The court noted that follow-

ing a significant decline in the liquidity of the debtor, which the

court found marked the onset of insolvency for purposes of this

case, the payment practices between the debtor and the defend-

ant changed significantly.80

Comparing the pre- and post-

insolvency payment practices, the court held that the payments

in question were not made in the ordinary course of business and

were therefore avoidable.81

In In re Circuit City Stores, Inc., Mitsubishi Digital Electronics

America, Inc., filed an administrative priority claim under

§ 503(b)(9) of the Bankruptcy Code for the value of goods trans-

ferred to the debtors during the twenty-day period immediately

preceding the petition date.82

The debtor filed an objection to this

claim under § 502(d) on the grounds that Mitsubishi had received

preferential transfers under § 547, and sought to temporarily dis-

allow the § 503(b)(9) claim pending the resolution of the prefer-

ence issue.83

The debtors and Mitsubishi entered into a settlement

agreement establishing a fully funded reserve, for the exclusive

benefit of Mitsubishi, sufficient to pay the § 503(b)(9) claim, from

which funds would be released to pay any ultimately allowed

amount of the claim.84

Following the initiation of an adversary proceeding seeking to

avoid and recover the alleged preferential transfers, Mitsubishi

77. Id. at *4.

78. Id.

79. Id. at *4–5 (citing Advo-System, Inc. v. Maxway Corp., 37 F.3d 1044, 1049 (4th

Cir. 1994)).

80. Id. at *5–6 & n.9.

81. Id. at *6.

82. 64 Collier Bankr. Cas. 2d (MB) 1314, 1317 (Bankr. E.D. Va. Dec. 1, 2010).

83. Id.

84. Id. at 1317–18.



asserted a defense under the new value exception set forth in

§ 547(c)(4) contending that the value of the transferred goods

comprising the § 503(b)(9) claim also can serve as “new value.”85

The debtors filed a motion for partial summary judgment, assert-

ing that Mitsubishi could not use the goods transferred within the

twenty days preceding the petition date as a basis for both a new

value defense and a § 503(b)(9) administrative claim.86

After analyzing the text of § 547(c)(4), the court agreed with

the debtor. As the parties stipulated that Mitsubishi did make a

contribution of new value to the debtors, the court examined

whether Mitsubishi had received an “‘otherwise unavoidable

transfer’” from the debtors on account of the new value.87

The

court first concluded that the establishment of the fully funded

reserve constituted a “‘transfer to or for the benefit of [the] credi-

tor’ on account of the subsequent new value” because the debtors

had “parted with their interest in the monies that have been set

aside in the reserve fund for the exclusive ‘benefit of’

Mitsubishi.”88

The allowance of the claim had been only temporar-

ily deferred pending resolution of the preference issue, and the

right of Mitsubishi to the total amount of any allowed § 503(b)(9)

claim for the value of the transferred goods was absolute.89

Next,

finding that § 549 did not apply because the creation of the re-

serve fund was approved by the court and that §§ 544, 547, 548,

and 553(b) apply only to pre-petition transfers, the court conclud-

ed that the transfer was “otherwise unavoidable.”90

Thus, the

court held that Mitsubishi either could claim an administrative

expense under § 503(b)(9) or use the value of the goods provided

to support a § 547(c)(4) new value defense, but it could not do

both.91

85. Id.

86. Id. at 1318–19.

87. Id. at 1322 (quoting 11 U.S.C. § 549(c)(4)(B) (2006)).

88. Id. at 1322–23 (alteration in original) (quoting 11 U.S.C. § 547(c)(4)(B) (2006)).

89. Id. at 1322.

90. Id. at 1324–25 (quoting 11 U.S.C. § 547(c)(4)(B)) (internal quotation marks omit-

ted).

91. Id. at 1327.



V. CRAM DOWN OF SECURITY INTEREST IN CHAPTER 13,

DEBTOR’S PRINCIPAL RESIDENCE

“Cram down” refers to, among other things, a debtor’s ability to

bifurcate a secured creditor’s claim into secured and unsecured

portions when the value of the property is less than the total

amount that remains owing on the debt.92

For example, if a debtor

owes $150,000 to her mortgage lender, but the house is worth on-

ly $100,000, under certain circumstances, a debtor could treat on-

ly $100,000 as a secured claim and treat the remaining $50,000

as an unsecured claim. When the debtor is in Chapter 13, and the

debt is secured by “a security interest in real property that is the

debtor’s principal residence,” however, cram down is unavailable

under § 1322(b)(2).93

In Ennis v. Green Tree Servicing (In re Ennis), the Fourth Cir-

cuit, in a direct appeal from the bankruptcy court, addressed a

question left open by the BAPCPA addition of a definition of the

“debtor’s principal residence” as including a mobile home even if

it is not attached to underlying real property.94

In that case, the

Chapter 13 joint debtors owned a mobile home and filed a Chap-

ter 13 plan that proposed cramming down the lender’s security

interest in the mobile home.95

The lender objected and asserted

that the plan could not be confirmed under § 1322(b)(2) because

the debtors used the mobile home as their principal residence.96

The bankruptcy court agreed with the lender, but on appeal the

Fourth Circuit disagreed and reversed.97

The Fourth Circuit held

that § 1322(b)(2) contains two distinct requirements—first, that

the security interest must be in real property, and second, that

the real property must be the debtor’s principal residence.98

The

court explained:

The definition of “debtor’s principal residence” addresses only the se-

cond requirement, “leaving the explicit ‘real property’ [requirement],

untouched.” Not only does the “debtor’s principal residence” defini-

tion avoid defining “real property,” but the definition also makes

92. See Shaw v. Aurgroup Fin. Credit Union, 552 F.3d 447, 449–451 (6th Cir. 2009)

(internal citations omitted).

93. 11 U.S.C. § 1322(b)(2) (2006).

94. 558 F.3d 343, 344–45 (4th Cir. 2009) (internal quotation marks omitted).

95. See id. at 345.

96. Id.

97. Id. at 344.

98. Id. at 345–46.



clear that whether a structure is a principal residence is independ-

ent of whether it might be real property. Specifically, the definition

states that a “debtor’s principal residence . . . means a residential

structure . . . without regard to whether that structure is attached to

real property.”99

In short, the Fourth Circuit held that “the real property re-

quirement of § 1322(b)(2)’s anti-modification clause survives the

definition of ‘debtor’s principal residence.’”100

Thus, the anti-

modification clause of § 1322(b)(2) applies only to real property

that is a debtor’s principal residence.101

VI. DISPOSABLE INCOME CALCULATION

In Hamilton v. Lanning, the Supreme Court resolved a

longstanding dispute over how to calculate a debtor’s “projected

disposable income” for purposes of § 1325(b)(1).102

Under this sec-

tion, if the trustee or an unsecured creditor objects to the confir-

mation of a debtor’s Chapter 13 plan, the plan only may be ap-

proved if the creditor’s claim is paid in full or if the plan provides

that “the debtor’s projected disposable income to be received in

the applicable commitment period beginning on the date that the

first payment is due under the plan will be applied to make pay-

ments to unsecured creditors under the plan.”103

While “projected

disposable income” is not defined by the Bankruptcy Code,

“‘[d]isposable income’ is . . . defined as ‘current monthly income

received by the debtor’ less ‘amounts reasonably necessary to be

expanded’ for the debtor’s maintenance and support.”104

“Current

monthly income” is calculated by averaging the debtor’s monthly

income during the six months prior to the petition date.105

The debtor in Hamilton received a one-time buyout from her

former employer during the six months prior to the petition date,

thus significantly inflating her “current monthly income” calcula-

99. Id. at 346 (alteration in original) (internal citations and quotation marks omitted).

100. Id.

101. See id.

102. 560 U.S. ___, ___, 130 S. Ct. 2464, 2469 (2010).

103. 11 U.S.C. § 1325(b)(1) (2006).

104. Hamilton, 560 U.S. at ___, 130 S. Ct. at 2469 (quoting 11 U.S.C.

§§ 1325(b)(2)(A)(i), (ii)).

105. Id. at ___, 130 S. Ct. at 2470 (citing 11 U.S.C. § 101(10A)(A)(i) (2006)) (internal

quotation marks omitted).



tion.106

Due to this buyout, the debtor reported a disposable in-

come of $1114.98 on her Form 22C.107

On the debtor’s Schedule I

and Schedule J, however, the debtor reported the income from

her new job as $1922 per month with expenses of $1772.97, leav-

ing a monthly disposable income of only $149.03.108

Based on her

new income, the debtor filed a plan that required her to pay $144

per month for thirty-six months.109

The Chapter 13 trustee objected on the grounds that the debtor

was not committing all of her “projected disposable income” to the

plan, arguing that her projected disposable income should be cal-

culated by multiplying the disposable income listed on the debt-

or’s Form 22C by the applicable commitment period.110

According

to the trustee, this “mechanical approach” required a payment of

$756 per month for a period of sixty months.111

The bankruptcy

court rejected the mechanical approach favored by the trustee

and upheld the debtor’s proposed $144 monthly payment, but re-

quired a sixty-month plan period.112

On appeal by the trustee,

both the Tenth Circuit Bankruptcy Appellate Panel and the

Tenth Circuit Court of Appeals affirmed the bankruptcy court’s

ruling.113

In affirming the lower courts, the Supreme Court held that,

while the mechanical approach advocated by the trustee is appro-

priate in most cases, the forward-looking approach utilized by the

debtor is permissible “where significant changes in a debtor’s fi-

nancial circumstances are known or virtually certain.”114

The

Court first examined the meaning of “projected disposable in-

come,” finding that, as the term is not defined by the Bankruptcy

Code, the ordinary meaning of “projected” should control.115

Thus,

“While a projection takes past events into account, adjustments

106. Id. at ___, 130 S. Ct. at 2470 (internal quotation marks omitted).

107. Id. at ___, 130 S. Ct. at 2470.

108. Id. at ___, 130 S. Ct. at 2470.

109. Id. at ___, 130 S. Ct. at 2470.


111. Id. at ___, 130 S. Ct. at 2470.

112. Id. at ___, 130 S. Ct. at 2470 (citing In re Lanning, Nos. 06-41037, -41260, 2007

WL 1451999, at *8 (Bankr. D. Kan. May 15, 2007)).

113. Id. at ___, 130 S. Ct. at 2471 (citing In re Lanning, 380 B.R. 17, 19 (2007); In re

Lanning, 595 F.3d 1269, 1270 (2008)).

114. Id. at ___, 130 S. Ct. at 2471.

115. Id. at ___, 130 S. Ct. at 2471 (quoting Asgrow Seed Co. v. Winterboer, 513 U.S.

179, 187 (1995)).



are often made based on other factors that may affect the final

outcome.”116

The Court next noted that “projected,” as used in oth-

er federal statutes, rarely means simple multiplication.117

Had

Congress intended that “projected disposable income” involve a

simple mathematical calculation, it would have specified so by us-

ing the term “multiplied” as it does in other areas of the Bank-

ruptcy Code.118

Third, the Court found that pre-BAPCPA courts

permitted debtors to deviate from the mechanical approach, as

the debtor proposed to do, when the circumstances warranted.119

As BAPCPA did not clearly alter this practice, the Court refused

to “read the Bankruptcy Code to erode past bankruptcy practice

absent a clear indication that Congress intended such a depar-

ture.”120

The Court therefore concluded that a debtor’s projected

disposable income calculation “may account for changes in the

debtor’s income or expenses that are known or virtually certain at

the time of confirmation.”121

Ransom v. FIA Card Services, N.A. resolved a split among the

circuits regarding whether a Chapter 13 debtor may properly

claim expenses on the means test calculation imposed by

§ 1325(b)(3) that the debtor does not actually incur.122

Under

Chapter 13, a debtor must pay creditors a sum equal or greater to

the debtor’s monthly disposable income multiplied by the number

of months in the plan term.123

Section 1325(b)(2) “defines ‘dispos-

able income’ as ‘current monthly income’ less ‘amounts reasona-

bly necessary to be expended’ for ‘maintenance or support,’ busi-

ness expenditures, and certain charitable contributions.”124

If a

debtor’s income exceeds the median income for the applicable

state, the means test set forth in § 707 defines the expenses that

qualify as “amounts reasonably necessary” to support the debt-

or.125

Section 707 provides that a debtor’s monthly expenses are

116. Id. at ___, 130 S. Ct. at 2472 (citing In re Kibbe, 361 B.R. 302, 312 n.9 (B.A.P. 1st

Cir. 2007)).

117. Id. at ___, 130 S. Ct. at 2472 (citations omitted).

118. Id. at ___, 130 S. Ct. at 2472 (internal quotation marks and citations omitted).


120. Id. at ___, 130 S. Ct. at 2473 (internal quotation marks and citations omitted).

121. Id. at ___, 130 S. Ct. at 2478.

122. 562 U.S. ___, ___, 131 S. Ct. 716, 723 (2011) (citing Ransom v. MBNA, 559 U.S.

___, 130 S. Ct. 2097 (2012)).

123. Id. at ___, 131 S. Ct. at 721.

124. Id. at ___, 131 S. Ct. at 721 (citing 11 U.S.C. §§ 1325(b)(2)(A)(i), (ii) (2006 & Supp.

IV 2010)).

125. Id. at ___, 131 S. Ct. at 721–22.



determined by the monthly amounts specified under the National

Standards and Local Standards guidelines issued by the Internal

Revenue Service for the area in which the debtor resides.126

In Ransom, the debtor owned a 2004 Toyota Camry free of any

debt.127

On the means test, the debtor claimed a car ownership

deduction in the amount of $471 as well as a separate car operat-

ing costs deduction in the amount of $338.128

The creditor, FIA

Card Services, subsequently objected to the debtor’s Chapter 13

plan, asserting that the debtor improperly lowered his disposable

income calculation by claiming the car ownership deduction for a

car on which he made no loan or lease payments.129

The bank-

ruptcy court denied confirmation of the debtor’s plan, holding

that he only could deduct vehicle-ownership expenses if he was

currently making loan or lease payments on the vehicle.130

Both

the Ninth Circuit Bankruptcy Appellate Panel and the Ninth Cir-

cuit Court of Appeals affirmed the ruling of the bankruptcy

court.131

The Supreme Court affirmed the decision of the court of ap-

peals.132

Noting that § 707(b)(2)(A)(ii)(I) states that “[t]he debtor’s

monthly expenses shall be the debtor’s applicable monthly ex-

pense amounts specified under the National Standards and Local

Standards,” the Court applied the plain meaning of the statute

and found that a debtor may claim a deduction “only if that de-

duction is appropriate for him.”133

A deduction is only appropriate

“if the debtor will incur that kind of expense during the life of the

plan.”134

The Court further found that this interpretation is sup-

ported by the language in § 1325(b) defining a debtor’s disposable

income as his “current monthly income . . . less amounts reasona-

126. Id. at ___, 131 S. Ct. at 722 (quoting 11 U.S.C. § 707(b)(2)(A)(ii)(I) (2006 & Supp.

IV 2010)).



129. See id. at ___, 131 S. Ct. at 723 (citations omitted).


131. Id. at ___, 131 S. Ct. at 723 (citing In re Ransom, 380 B.R. 799, 808–09 (B.A.P. 9th

Cir. 2007); In re Ransom, 577 F.3d 1026, 1027 (9th Cir. 2004)).

132. Id. at ___, 131 S. Ct. at 723.

133. Id. at ___, 131 S. Ct. at 724 (emphasis added) (quoting 11 U.S.C. §

707(b)(2)(A)(ii)(I) (2006 & Supp. IV 2010)) (internal quotation marks and citations omit-

ted).

134. Id. at ___, 131 S. Ct. at 724.



bly necessary to be expended.”135

As Congress intended the means

test to approximate a debtor’s actual and reasonable expenditures

on essential items, “a debtor should be required to qualify for a

deduction by actually incurring an expense in the relevant cate-

gory.”136

Finally, the Court found that denying deductions for ex-

penses that the debtors do not actually incur furthers Congress’s

intention to ensure that debtors repay creditors the maximum

amount they can afford.137

As the debtor did not actually incur

any expenses for loan or lease payments on his vehicle, the Court

held that the debtor could not properly claim an expense for such

expenses on the means test.138

The Fourth Circuit in Morris v. Quigley (In re Quigley)139

was

presented with a variation of the fact pattern presented in Hamil-

ton v. Lanning.140

The debtor listed two all-terrain vehicles

(“ATVs”) on her Schedule B and stated on her Schedule D that

the ATVs were collateral for promissory notes that she had exe-

cuted.141

The debtor accordingly listed the payments on the ATVs

as expense deductions when calculating her monthly disposable

income.142

In her Chapter 13 plan, however, she indicated that she

would be surrendering both ATVs to the secured creditors and no

longer would be required to make the payments.143

The Chapter 13 trustee objected to the debtor’s proposed plan,

alleging that the debtor had understated her disposable income

by improperly deducting, inter alia, the payments for the ATVs

when the debtor would in fact no longer be responsible for such

payments during the life of the plan.144

Ruling prior to the deci-

sion in Lanning, the bankruptcy court overruled the trustee’s ob-

jection on the grounds that projected disposable income was

based only on the expenses and income in the six months prior to

the petition date and that it was statutorily prohibited from con-

135. Id. at ___, 131 S. Ct. at 724 (quoting 11 U.S.C. § 1325(b)(2) (2006 & Supp. IV

2010)) (internal quotation marks omitted).

136. Id. at ___, 131 S. Ct. at 725.

137. Id. at ___, 131 S. Ct. at 725 (quoting H.R. REP. NO. 109-31, pt. 1, at 2 (2005)).

138. Id. at ___, 131 S. Ct. at 730.

139. 673 F.3d 269 (4th Cir. 2012).

140. 560 U.S. ___, 130 S. Ct. 2464 (2010).

141. In re Quigley, 673 F.3d at 270.

142. Id.

143. Id.

144. Id. at 271.



sidering even known changes in the debtor’s future expenses.145

The district court affirmed.146

Applying Lanning, which was released between the ruling in

the district court and the consideration of the case by the Fourth

Circuit, the Fourth Circuit reversed the decision of the district

court on the same rationale articulated by the Supreme Court.147

The Fourth Circuit held that a court may properly “account for

changes in the debtor’s income or expenses that are known or vir-

tually certain at the time of confirmation.”148

The court also specif-

ically rejected the debtor’s contention that the circumstances pre-

sented did not rise to the level of “exceptional” and that the

bankruptcy court was therefore within its rights to not take them

into account, as well as the contention that the sums involved

were not sufficient to warrant the court’s consideration.149

As re-

moving the ATV payments from the disposable income calculation

would result in a two-thirds increase in the debtor’s payments to

creditors, the court found that failing to correct for these pay-

ments would result in the very type of “senseless result” that the

Supreme Court sought to prevent in Lanning.150

In Johnson v. Zimmer, the Fourth Circuit considered how to

determine a Chapter 13 debtor’s household size for purposes of

calculating the debtor’s disposable income.151

The debtor shared

custody of her two children with her former husband, the children

spending approximately 204 days per year at the debtor’s resi-

dence.152

The debtor’s second husband, with whom she resided,

shared custody of his three children, who resided in the debtor’s

residence approximately 180 days per year.153

The debtor applied

the “heads-on-beds” approach utilized by the United States Cen-

sus Bureau, counting “all the people who occupy a housing unit”

and listing a household size of seven.154

The debtor’s former hus-

145. Id.

146. Id.

147. Id. at 274 (quoting Hamilton v. Lanning, 560 U.S. ___, ___, 130 S. Ct. 2464, 2475

(2012)).

148. Id. at 273 (quoting Lanning, 560 U.S. at ___, 130 S. Ct. at 2478) (internal quota-

tion marks omitted).

149. Id. at 273–74 (quoting Lanning, 560 U.S. at ___, 130 S. Ct. at 2471).

150. Id. at 274 (quoting Lanning, 560 U.S. at ___, 130 S. Ct. at 2475).

151. 686 F.3d 224, 225 (4th Cir. 2012).

152. Id. at 226.

153. Id. (footnote omitted).

154. Id. (internal quotation marks and citation omitted).



band, who was also a creditor, subsequently objected to the debt-

or’s Chapter 13 plan on the grounds that the debtor had miscalcu-

lated the household size and thus incorrectly calculated her

monthly disposable income.155

The bankruptcy court rejected the “heads-on-beds” method ap-

plied by the debtor in favor of a variation of the “economic unit”

approach, which assesses the number of individuals that act as a

“single economic unit” in a household.156

In addition to full-time

residents, the court included part-time residents according to the

percentage of the year in which they reside in the household.157

Under this calculation, the debtor’s two children who resided in

the household 204 days per year each constituted 0.56 members

of the household, while the debtor’s three stepchildren who resid-

ed in the household 180 days per year each constituted 0.49

members.158

This “fractional economic unit approach” resulted in

the debtor having 2.59 children in the household, which the court

rounded up to three.159

The court found that, as the debtor’s cor-

rect household size was five persons, the plan could not be con-

firmed as proposed.160

The Fourth Circuit affirmed the decision of the bankruptcy

court, finding that, as the Bankruptcy Code does not mandate a

particular method, the economic unit approach best effectuates

the intent and purpose of the code.161

The court first expressly re-

jected the heads-on-beds test, finding that it is “wholly unrelated

to any bankruptcy purpose.”162

The court stated that, as the test

was developed simply to permit the Census Bureau to determine

the number of people in a geographic region, it does not “serve the

Code’s objective of identifying a debtor’s deductible monthly ex-

penses and, ultimately, his or her disposable income.”163

The eco-

nomic unit approach, in contrast, is “consistent with § 1325(b),

the BAPCPA, and the Code as a whole.”164

The court specifically

155. Id.

156. Id. at 226–27 (citations omitted).

157. Id. at 227.

158. Id. (footnote omitted) (citing In re Johnson, No. 10-072448-JRL, 2011 WL 5902883,

at *3 (Bankr. E.D.N.C. July 21, 2011)).

159. Id.

160. Id.

161. Id. at 227–28.

162. Id. at 236.

163. Id.

164. Id. at 237.



noted the test’s utility in examining the “financial interdepend-

ence of individuals to determine whether someone is an economic

part of the debtor’s household,” which the court defined as “those

the debtor financially supports and those who financially support

the debtor.”165

The court further held that the economic unit ap-

proach is most consistent with the Supreme Court’s decision in

Hamilton v. Lanning, as it recognizes that bankruptcy courts

should possess the flexibility to avoid a mechanical application of

the code in favor of an approach that permits courts to most accu-

rately approximate a debtor’s household size, given the nuances

of a debtor’s particular family situation.166

VII. CLAIMS

A company in financial distress often is compelled to lay off

various parts of its workforce both before and after filing a bank-

ruptcy petition. Many companies implement severance benefit

plans for all or a portion of their employees in good times, and

they even do so in bad times in an attempt to prevent a mass exo-

dus of talented, operationally important employees at a time

when the company is struggling to keep the lights on. Unsurpris-

ingly, then, issues relating to employees’ claims for severance

benefits occur frequently in corporate bankruptcy cases.

In bankruptcy, creditors receive distributions on their claims

according to the statutory order of priority set forth in § 507(a) of

the Bankruptcy Code.167

Fourth in priority are employee claims

(up to a capped amount for each employee) for “wages, salaries, or

commissions, including vacation, severance, and sick leave pay,”

that are earned within 180 days before the petition date.168

In a

direct appeal arising out of LandAmerica’s bankruptcy case, the

Fourth Circuit addressed whether, and to what extent, an em-

ployee’s claim for severance benefits is entitled to priority under

§ 507(a)(4).169

165. Id.

166. Id. at 242 (footnote omitted) (citing Hamilton v. Lanning, 560 U.S. ___, ___, 130 S.

Ct. 2464, 2471–78 (2010)).

167. See 11 U.S.C. § 507(a) (2006 & Supp. IV 2010).

168. See id. § 507(a)(4).

169. Matson v. Alarcon, 651 F.3d 404, 406 (4th Cir. 2011).



The liquidating trustee in LandAmerica objected to more than

one hundred priority claims filed by employees for severance ben-

efits, arguing that the severance benefits were “earned” over the

entire course of the employees’ employment because the sever-

ance plan at issue provided for different amounts of severance

pay based on the length of a given employee’s employment and

that the amount eligible for priority should be prorated.170

The

bankruptcy court rejected this argument and held that the sever-

ance benefits were earned on the date of termination, which in

this case occurred within 180 days before the petition date.171

The

liquidating trustee, with authorization from the bankruptcy

court, appealed directly to the Fourth Circuit.172

In resolving just when severance benefits are “earned” within

the meaning of § 507(a)(4), the Fourth Circuit was compelled to

draw on dictionary definitions of “severance pay” and “earned”

because such terms are undefined in the Bankruptcy Code.173

The

Fourth Circuit also highlighted the unique nature and purpose of

severance pay, as opposed to other forms of employee compensa-

tion:

The triggering events permitting employees to receive wages, sala-

ries, and commissions generally lie within the employees’ control up-

on performance of their work, subject to the terms of the employ-

ment agreement. . . .

In contrast to wages, salaries, and commissions, the triggering

events allowing employees to receive “severance pay” lie within the

employer’s control and its decision both to provide severance com-

pensation and to terminate the employment relationship. Thus, em-

ployees do not “earn” “severance pay” in exchange for services ren-

dered as they do when they “earn” wages, salaries, and commissions.

Rather, employees receive “severance pay” as compensation for the

injury and losses resulting from the employer’s decision to terminate

the employment relationship. This ordinary understanding of the

term “severance pay” is consistent with the stated purpose of the

plan in the present case, namely, to assist employees upon termina-

tion.174

170. See id. at 407.

171. See id. at 407–08.

172. See id. at 406.

173. See id. at 408, 409 (quoting WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY

714 (2002); id. at 2081) (citing Scrimgeour v. Internal Revenue, 149 F.3d 318, 327 (4th Cir.

1989)).

174. See id.



On that basis, the Fourth Circuit then concluded that “to be-

come entitled, represents the ordinary meaning of the manner in

which employees ‘earn’ ‘severance pay,’ within the intendment of

Congress . . . . [A]n employee ‘earns’ the full amount of ‘severance

pay’ on the date the employee becomes entitled to receive such

compensation . . . .”175

This date typically will be the date on which

an employee is terminated, which in this case was within the 180-

day period before the bankruptcy petition was filed, and the

Fourth Circuit therefore affirmed the bankruptcy court’s deci-

sion.176

VIII. CLASS ACTIONS

In Gentry v. Siegel, the Fourth Circuit addressed the means by

which a putative class of claimants may seek certification in a

bankruptcy court.177

Four former employees of Circuit City Stores,

Inc., filed proofs of claim asserting that each claim was filed for

the named claimant, and on behalf of other former employees

similarly situated.178

The bankruptcy court rejected these at-

tempts to certify classes of claimants, ruling that the claimants

were not authorized to file class proofs of claim; that the motion

under Federal Rules of Bankruptcy Procedure, Rule 9014, to in-

corporate Rule 7023, regarding class actions, was untimely; that

the already-established bankruptcy claims resolution process

would be superior to the class action process for handling the

claims of potential class members; and that potential claimants

had received constitutionally adequate notice of the bankruptcy

proceedings and the applicable proof of claim deadlines.179

The Fourth Circuit affirmed in part and reversed in part, but

ultimately agreed with the bankruptcy and district courts that

class certification was not warranted in this case.180

The court

first held that claimants seeking class certification in a bankrupt-

cy proceeding may file a claim on behalf of themselves and other

similarly situated claimants, as the claimants did here.181

Howev-

175. See id. at 409 (footnote omitted).

176. Id. at 410.

177. See 668 F.3d 83, 86, 90 (4th Cir. 2012).

178. Id. at 85.

179. Id.

180. See id. at 86.

181. Id. at 90.



er, this claim only constitutes a proposal to represent the class,

which must then be approved by the bankruptcy court.182

If ap-

proval subsequently is received, such approval relates back to the

time of filing.183

Should approval be denied, the court required

that putative class members be given reasonable time to file indi-

vidual proofs of claim following such rejection.184

The court then held that the claimants’ motion under Rule

9014 to apply Rule 7023 was not untimely.185

The court stated

that Rule 9014 applies only to contested matters, which do not

arise from a proof of claim until an objection to the claim has been

filed.186

Here, the court found that the motion under Rule 9014

was filed shortly after the objection to the class proofs of claim

was filed and was therefore timely.187

Having reversed the prior courts on these points, the court

then found that the bankruptcy court did not abuse its discretion

in ruling that the bankruptcy claims resolution process was supe-

rior to the class action process in resolving the claims of putative

class members.188

The court noted that the bankruptcy court pre-

viously had established an effective process for resolving large

numbers of claims and thus had determined that the addition of

several hundred potential class claims would not negatively im-

pact the claims resolution process.189

The court finally held that as

no class had been certified, putative class members were not enti-

tled to the notice provisions contained in Rule 7023.190

The only

required notice was that giving notice of the bankruptcy proce-

dures and the claims bar date.191

Accordingly, as the bankruptcy

court had considered the claimants’ motion on the merits, the

court affirmed the ultimate decision of the lower courts.192

182. Id.

183. Id.

184. Id. The court also noted that the requirement that putative class members be giv-

en the opportunity to file individual claims was not at issue because no unnamed claimant

had attempted, nor indicated any intent, to file an individual proof of claim. Id. at 91.

185. Id. at 92.

186. Id. (quoting Certified Class in Charter Sec. Litig. v. Charter Co. (In re Charter

Co.), 876 F.2d 866, 874–75 (11th Cir. 1989)).

187. Id.

188. See id. at 92–94 (internal citations omitted).

189. See id. at 93.

190. See id. at 94.

191. Id.

192. See id. at 95.



Shortly after the Fourth Circuit’s decision was released in Gen-

try v. Siegel, the Bankruptcy Court for the Eastern District of

Virginia again was confronted with a substantially similar fact

pattern in In re Movie Gallery, Inc.193

The claimant timely filed an

unsecured priority claim in the amount of “$10,950/class member”

for “wages, salaries, and compensation.”194

The claim did not con-

tain a clear statement that it was being filed on behalf of a class,

but the claimant did attach a copy of a complaint filed in Califor-

nia state court seeking to pursue a class action against the debt-

or.195

Due to the vague nature of the claim, the liquidating trustee

did not become aware that the claimant considered his claim to be

on behalf of a class until approximately six months after the

debtor’s Chapter 11 plan had been confirmed.196

The claimant

filed a motion for an order applying Rule 7023 to his proof of

claim approximately two weeks prior to the scheduled hearing on

the trustee’s objection to his claim.197

The court noted that, while Gentry held that class claims may

be allowed in a bankruptcy case, such claims only should be al-

lowed “if doing so would produce ‘a more practical and efficient

process for the adjudication of claims.”198

The court then found

that—given the advanced stage of the case, the fact that few

claims remained unresolved, and the fact that substantially all of

the debtor’s hard assets had been liquidated—certification of a

class action would “serve only to throw the entire administration

of the case into chaos.”199

The claimants’ motion therefore was de-

nied.200

IX. DISCHARGEABILITY

There are some debts a debtor cannot discharge in bankruptcy.

An example is a “debt . . . for a tax . . . with respect to which a re-

turn, or equivalent report or notice, if required[,] was not filed or

193. See In re Movie Gallery, Inc., No. 10-30696-DOT, 2012 WL 909501, at *1 & nn.3–4

(Bankr. E.D. Va. 2012) (footnotes omitted).

194. Id. at *2 (internal quotation marks omitted).


196. Id. at *3.

197. Id.

198. Id. at *4 (quoting Gentry v. Siegel, 668 F.3d 83, 90 (4th Cir. 2012)).

199. Id. at *5.

200. Id.



given.”201

This reflects a legislative policy concern that the debt-

or’s fresh start in bankruptcy should not be obtained at the ex-

pense of “the tax collector, who . . . has not had reasonable time to

collect” and that the discharge should not apply to tax claims “to

whose staleness the debtor contributed by some wrong-doing or

serious fault.”202

In Maryland v. Ciotti (In re Ciotti), the Fourth Circuit held that

a state’s pre-petition tax claims were not discharged because the

debtor failed to file a required report with state taxing authori-

ties, the purpose of which was to notify state taxing authorities

that the IRS had adjusted the debtor’s federal income.203

Although

the debtor failed to file the report, the IRS separately notified the

state of the adjustment to the debtor’s income, and the state, in

turn, made adjustments to the debtor’s state returns, adding

more than $500,000 in taxes, penalties, and interest for the tax

years at issue.204

The Fourth Circuit held that the state’s claims for these taxes

were not discharged because the 2005 BAPCPA amendments to

the Bankruptcy Code specifically added the failure to file an

“‘equivalent’ . . . ‘report or notice’” as a circumstance that will

cause a tax debt to be nondischargeable, and the report at issue

in Ciotti was the equivalent to a tax return.205

For instance, the

report was found to be similar to a tax return because submitting

false or misleading information in the report could lead to crimi-

nal liability under applicable state law, and one element of a tax

return is that it is submitted under penalty of perjury.206

In addi-

tion, the report satisfied the element of a tax return that it con-

tain sufficient data to compute tax liability because the report re-

quired the taxpayer to submit as an attachment to the report a

complete copy of the federal audit, including all exhibits.207

The

201. 11 U.S.C. § 523(a)(1)(B)(i) (2006 & Supp. IV 2010).

202. Compare id., with S. REP. NO. 95-989, at 14 (1978), reprinted in 1978 U.S.C.C.A.N.

5787, 5800.

203. See 638 F.3d 276, 278 (4th Cir. 2011).

204. Id.

205. Id. at 279, 280 (citing Bankruptcy Abuse Prevention and Consumer Protection

Act, Pub. L. 109-85, § 714, 119 Stat. 23 (2005) (codified as amended at 11 U.S.C. §

523(a)(1)(B) (2006))).

206. See id. at 280 (citing MD. CODE ANN., TAX-GEN. § 13-1204(a) (LexisNexis Repl.

Vol. 2010)).

207. See id. at 280–81 (quoting Maroney v. United States (In re Moroney), 352 F.2d

902, 905 (4th Cir. 2003); MD. CODE REGS. 03.04.02.11 (2012)).



Fourth Circuit rejected the argument that the report was “given”

because the IRS separately informed state taxing authorities of

the adjustment to the debtor’s income because the applicable

state statute provided that “‘the person shall submit to the tax

collector a report of federal adjustment . . . .’”208

For all of these

reasons, the Fourth Circuit concluded that the tax debt was not

discharged.209

Another type of debt not generally capable of being discharged

in a bankruptcy case is student loan debt. In order to discharge

student loan debt of a Chapter 13 debtor, the bankruptcy court

must find that failure to discharge the student loan debt would

impose an “undue hardship” on the debtor.210

In United Student

Aid Funds, Inc. v. Espinosa, the Supreme Court granted certiora-

ri to resolve a circuit split regarding whether a bankruptcy court

order entered in contravention of these rules is void.211

In Espinosa, a Chapter 13 debtor filed a proposed plan listing

only his student loan debt and proposing to repay the principal of

such debt, but providing for the discharge of all accrued interest

once the principal was repaid.212

The debtor did not comply with

the procedural requirement of initiating an adversary proceeding

to determine the dischargeability of a debt as set forth under

Federal Rules of Bankruptcy Procedure, Rule 7001(6).213

However,

the creditor, United Student Aid Funds, Inc. (“United”), received

actual notice of the proposed plan and failed to object to the pro-

posed plan or appeal the bankruptcy court’s order confirming the

plan.214

The bankruptcy court did not make any findings regard-

ing whether the student loan debt posed an undue hardship if it

were not discharged. Several years after the debtor completed his

plan payments and the bankruptcy court entered an order dis-

charging the debtor, United filed a motion under Federal Rules of

Civil Procedure, Rule 60(b)(4), requesting that the bankruptcy

208. Id. at 281 (quoting MD. CODE ANN., TAX-GEN. § 13-409(b)).

209. Id.

210. 11 U.S.C. §§ 523(a)(8), 1328(a)(2) (2006 & Supp. IV. 2010).

211. 559 U.S. ___ , ___, 130 S. Ct. 1367, 1373 (2010).

212. Id. at ___, 130 S. Ct. at 1373, 1374 (citations omitted).

213. Id. at ___, 130 S. Ct. at 1373 (citing FED. R. BANKR. P. 7001(6), 7003, 7004, 7008).

214. Id. at ___, 130 S. Ct. at 1373.



court set aside its order confirming the debtor’s plan as a void

judgment.215

United argued that the confirmation order was void for two

reasons: first, the order was inconsistent with §§ 523(a)(8) and

1328(a) of the Bankruptcy Code and Rule 7001(6) of the Federal

Rules of Bankruptcy Procedure; second, United’s due process

rights had been violated because the debtor did not initiate an

adversary proceeding by filing and serving a summons and com-

plaint as required by Federal Rules of Bankruptcy Procedure,

rules 7003, 7004, and 7008.216

The bankruptcy court rejected both

of these arguments and denied United’s Rule 60 motion.217

On United’s appeal, the district court reversed and held that

“United was denied due process because the confirmation order

was issued without service of the summons and complaint the

Bankruptcy Rules require.”218

Espinosa, the debtor, then appealed

to the Ninth Circuit and won.219

The Ninth Circuit ultimately

concluded that by confirming Espinosa’s plan without first finding

undue hardship in an adversary proceeding, the Bankruptcy Court

at most committed a legal error that United might have successfully

appealed, but that any such legal error was not a basis for setting

aside the confirmation order as void under Rule 60(b).220

United then appealed to the Supreme Court,221

which ruled

against United and upheld (for the most part) the Ninth Circuit’s

decision.222

The Supreme Court first explained “that a void judgment is one

so affected by a fundamental infirmity that the infirmity may be

raised even after the judgment becomes final.”223

A judgment is

not void “simply because it is or may have been erroneous,”224

and

215. Id. at ___, 130 S. Ct. at 1374.

216. Id. at ___, 130 S. Ct. at 1374–75 (citations omitted).

217. Id. at ___, 130 S. Ct. at 1375.

218. Id. at ___, 130 S. Ct. at 1375.

219. Id. at ___, 130 S. Ct. at 1375.

220. Id. at ___, 130 S. Ct. at 1375 (citing Espinosa v. United Student Aid Funds, Inc.,

553 F.3d 1193, 1198–1202 (9th Cir. 2008)) (footnote omitted).

221. Id. at ___, 130 S. Ct. at 1376 (citing United Student Aid Funds, Inc. v. Espinosa,

557 U.S. ___, 129 S. Ct. 2791 (2009)).

222. See id. at ___, 130 S. Ct. at 1378, 1382.


224. Id. at ___, 130 S. Ct. at 1377 (quoting Hault v. Hault, 57 F.3d 1, 6 (1st Cir. 1995))

(internal quotation marks omitted) (citing 12 J. MOORE ET AL., MOORE’S FEDERAL

PRACTICE § 60.44[1][a], at 60-150 to 60-151 (3d ed. 2007)).



“a motion under Rule 60(b)(4) is not a substitute for a timely ap-

peal.”225

Rather, Rule 60(b)(4) provides relief from a judgment that

is “premised either on a certain type of jurisdictional error or on a

violation of due process that deprives a party of notice or the op-

portunity to be heard.”226

In this case, the Supreme Court noted that United did not as-

sert that the confirmation order suffered from a jurisdictional de-

fect and explained that any such assertion would have failed in

any event because § 523(a)(8) (requiring a finding of undue hard-

ship before discharging student loan debt) and the applicable

bankruptcy rules (requiring the initiation of an adversary pro-

ceeding to determine the dischargeability of student loan debt)

are not jurisdictional.227

The Supreme Court rejected the notion

that United’s due process rights were violated because “United

received actual notice of the filing and contents of Espinosa’s

plan. This more than satisfied United’s due process rights. . . .

Espinosa’s failure to serve a summons and complaint does not en-

title United to relief under Rule 60(b)(4).”228

The Supreme Court also rejected United’s argument that the

confirmation order was void because it was entered in violation of

the Bankruptcy Code.229

First, the Court held that

a failure to find undue hardship in accordance with § 523(a)(8) is

[not] on par with the jurisdictional and notice failings that define

void judgments . . . . Instead, § 523(a)(8) requires a court to make a

certain finding before confirming the discharge of a student loan

debt . . . . [This] does not mean that a bankruptcy court’s failure to

make the finding renders its subsequent confirmation order

void . . . .230

The Court concluded that the bankruptcy court’s failure to make

the required factual findings regarding undue hardship before

confirming Espinosa’s plan “was a legal error . . . [b]ut the order

remains enforceable and binding on United because United had

225. Id. at ___, 130 S. Ct. at 1377 (citing Kocher v. Dow Chem. Co., 132 F.3d 1225, 1229

(8th Cir. 1997); MOORE ET AL., supra note 224, § 60.44[1][a], at 60-150).


227. Id. at ___, 130 S. Ct. at 1377–78 (citing Arbaugh v. Y & H Corp., 546 U.S. 500,

515–16 (2006); Kontrick v. Ryan, 540 U.S. 443, 454 (2004)).

228. Id. at ___, 130 S. Ct. at 1378.

229. Id. at ___, 130 S. Ct. at 1380.

230. Id. at ___, 130 S. Ct. at 1379 (footnote omitted).



notice of the error and failed to object or timely appeal.”231

To this

extent, the Supreme Court agreed with the Ninth Circuit’s deci-

sion.232

However, the Supreme Court specifically disagreed with the

Ninth Circuit’s holding that “bankruptcy courts must confirm a

plan proposing the discharge of a student loan debt without a de-

termination of undue hardship in an adversary proceeding unless

the creditor timely raises a specific objection.”233

This was, accord-

ing to the Supreme Court, “a step too far.”234

Instead, the Court

held that it is “plain that bankruptcy courts have the authority—

indeed, the obligation—to direct a debtor to confirm his plan to

the requirements of §§ 1328(a)(2) and 523(a)(8) . . . . [E]ven if the

creditor fails to object or appear in the adversary proceeding.”235

X. ETHICAL ISSUES

Legal ethics require particular attention in the bankruptcy

realm, as the Bankruptcy Code imposes heightened ethical duties

and conflict of interest rules in addition to any regulations enact-

ed by state bar organizations. In In re Pinebrook, LLC, the Bank-

ruptcy Court for the Eastern District of Virginia analyzed wheth-

er counsel for a debtor limited liability company was disinterested

under § 327(a) of the Bankruptcy Code when counsel had received

retainers from members of the debtor who were also creditors as

a result of loans made to the corporation.236

Pinebrook LLC was a

limited liability company whose members were also limited liabil-

ity companies.237

Counsel for the debtor received retainers from

several of these member limited liability companies, none of

whom were in control of the debtor.238

Several of the companies

that provided the retainers to counsel were also creditors by vir-

tue of loans made to the debtor prior to bankruptcy when no other

source of funding was available.239

The United States trustee

231. Id. at ___, 130 S. Ct. at 1380.

232. Id. at ___, 130 S. Ct. at 1380.

233. Id. at ___, 130 S. Ct. at 1380 (citing Espinosa v. United Student Aid Funds, Inc.,

553 F.3d 1193, 1205 (9th Cir. 2008)).

234. Id. at ___, 130 S. Ct. at 1380.

235. Id. at ___, 130 S. Ct. at 1381 (footnote and citation omitted).

236. 441 B.R. 67, 68 (Bankr. E.D. Va. 2009).

237. Id.

238. Id.

239. Id.



sought to deny counsel’s application for compensation on the

grounds that counsel was not disinterested under §§ 101(14) and

327(a) as a result of these retainers.240

The court held that counsel is not per se prohibited from receiv-

ing compensation from a creditor of the debtor.241

Under § 101(14)

of the Bankruptcy Code, which defines a disinterested person, a

party cannot hold an interest “materially adverse” to the estate or

any class of creditors or equity security holders.242

In setting this

“materially adverse” standard, the court explained that Congress

implicitly contemplated that some level of adversity may exist

without requiring disqualification.243

Accordingly, a court should

examine the “nexus between the creditor/guarantor making the

payment and the debtor itself.”244

Where the creditor paying the

fees also is controlling the debtor, and where the personal inter-

ests of the creditor likely are to be at odds with the debtor, courts

likely will find that counsel is not disinterested.245

The court noted

that the parties that provided the retainers at issue had no

means by which they could control the debtor or the debtor’s

counsel and, therefore, found that the limited adversity that ex-

isted did not require the denial of compensation to the debtor’s

counsel.246

In In re Lewis Road, LLC, however, the court was not so forgiv-

ing of such a conflict.247

The sole assets of the debtor were two ad-

joining pieces of property that were encumbered by two liens held

by a bank and a limited liability company, respectively.248

After

the tenant leasing the property from the debtor elected not to re-

new its lease, the tenant and the debtor entered into a settlement

agreement to address damage and structural changes to the

property.249

Pursuant to this agreement, $74,549.18 was to be

paid to the junior lienholder to reimburse it for its attorneys’ fees

240. Id.

241. Id. at 69.

242. 11 U.S.C. § 101(14) (2006).

243. In re Pinebrook, LLC, 441 B.R. at 69.

244. Id.

245. See id.

246. Id.

247. No. 09-37672, 2011 WL 6140747, at *14 (Bankr. E.D. Va. Dec. 9, 2011).

248. Id. at *1.

249. Id. at *2 (footnote omitted).



and costs incurred in connection with the settlement.250

The court

approved this settlement agreement pursuant to Federal Rules of

Bankruptcy Procedure, Rule 9019.251

Several months after the settlement agreement was approved,

the United States trustee informed the court of a conflict between

counsel for the debtor and counsel for the junior lienholder.252

Not

only were respective counsel father and son, but they were also

members of the same law firm.253

Counsel for the debtor argued

that the conflict was disclosed to the court in its application for

employment, that it had received a waiver of any potential con-

flict from both the debtor and the junior lienholder, and that he

did not feel that the conflict was problematic because “‘everyone

was working together to achieve a positive resolution to [the]

matter.’”254

The United States trustee then filed a motion under

Federal Rules of Civil Procedure, Rule 60(b), as made applicable

by Federal Rules of Bankruptcy Procedure, Rule 9024, to amend

the settlement agreement to rescind approval of the junior

lienholder’s attorneys fees and to require the disgorgement of

these funds to the estate.255

The court found the disclosure of the potential conflict in coun-

sel’s application for employment to be grossly insufficient.256

Pur-

suant to Federal Rules of Bankruptcy Procedure, Rule 2014,

counsel was required to disclose any connections with the debtor,

creditors, or any other parties in interest.257

Counsel’s disclosure

simply stated that it had “connections with a creditor” and did not

elaborate further.258

The court further found that any purported

waiver of the conflict was ineffective without the approval of the

court, as counsel must independently satisfy the requirements of

§ 327.259

“Any waiver of the conflict required written notice to all

parties in interest in the case and the approval of the bankruptcy

250. Id. (citation omitted).


252. Id.

253. Id. at *2–3.

254. Id. at *3 (citations omitted).

255. Id. at *1, *5.

256. Id. at *9.

257. Id. at *6; FED. R. BANKR. P. 2014(a).

258. In re Lewis Road, LLC, 2011 WL 6140742, at *9.

259. Id. at *10 (citing In re Wynne Residential Asset Mgmt., LLC, 62 Collier Bankr.

Cas. 2d (MB) 1937, 1944 (Bankr. W.D.N.C. Dec. 18, 2009)).



court.”260

Having rejected the arguments of debtor’s counsel, the

court granted the trustee’s motion under Rule 60(b), found that

counsel’s representation of the debtor violated the requirements

of § 327(a) and Rule 2014, and required that all moneys received

by counsel’s firm in connection with the case be disgorged.261

XI. EXEMPTIONS

When a bankruptcy petition is filed, all of a debtor’s assets be-

come “property of the estate” and subject to creditors’ claims, ad-

ministration by the trustee, if one is appointed, and oversight by

the bankruptcy court.262

Section 522 of the Bankruptcy Code au-

thorizes a debtor to exempt certain property from the estate with-

in statutorily defined limits.263

The Federal Rules of Bankruptcy

Procedure require a debtor to file a schedule of assets on the Offi-

cial Form titled “Schedule B” and a list of claimed exemptions on

the Official Form titled “Schedule C.”264

Under Federal Rules of

Bankruptcy Procedure, Rule 4003(b), interested parties generally

must object to a debtor’s claimed exemptions within thirty days

after conclusion of the meeting of creditors that must be held un-

der 11 U.S.C. § 341(a) and Federal Rules of Bankruptcy Proce-

dure, Rule 2003(a).265

Section 522(l) provides that “[u]nless a par-

ty in interest objects, the property claimed as exempt on such list

is exempt.”266

In Schwab v. Reilly, the Supreme Court granted certiorari in

an appeal arising from a bankruptcy court decision in Pennsylva-

nia (within the Third Circuit) to resolve a circuit split regarding

an interested party’s duty to object to a debtor’s claimed exemp-

tion when a debtor lists the value of the exemption on Schedule C

260. Id. (citing In re Wynne Residential Asset Mgmt., LLC, 62 Collier Bankr. Cas. 2d

(MB) at 1944).

261. Id. at *14 (citations omitted).

262. See 11 U.S.C. § 541(a)(1) (2006) (“[The] estate is comprised of all the following

property, wherever located and by whomever held . . . all legal or equitable interests of the

debtor in property as of the commencement of the case.”).

263. See generally 11 U.S.C. § 522 (2006).

264. See FED. R. BANKR. P. 1007(b)(1)(A); FED. R. BANKR. P. 4003(a); 11 U.S.C. app. Of-

ficial Bankr. Form 6B (2006 & Supp. IV 2010); id. app. Official Bankr. Form 6C (2006 &

Supp. IV 2010).

265. See FED. R. BANKR. P. 4003(b)); FED. R. BANKR. P. 2003(a).

266. 11 U.S.C. § 522(l) (2006).



in an amount equivalent to the amount the debtor listed as the

asset’s value on Schedule B.267

Reilly in Schwab v. Reilly was a caterer who filed a Chapter 7

bankruptcy petition and claimed an exemption in cooking and

other kitchen equipment that was worth $10,718, according to

her estimate of fair market value as of the petition date.268

Schwab, the Chapter 7 trustee in Reilly’s bankruptcy case

charged with liquidating the debtor’s assets for the benefit of

creditors, did not object to the claimed exemption within the

deadline because the amount Reilly claimed as exempt was with-

in the statutory limits.269

However, an appraisal of the equip-

ment—performed before the objection deadline expired—revealed

that it was worth as much as $17,200.270

After the deadline to ob-

ject passed, Schwab moved for authority to auction the equipment

and distribute $10,718 to Reilly on account of her exemption but

distribute the remainder to Reilly’s creditors.271

Reilly objected

and argued that

by equating on Schedule C the total value of the exemptions she

claimed in the equipment with the equipment’s estimated market

value [i.e., the value Reilly had scheduled on Schedule B as the value

of the equipment], she had put Schwab and her creditors on notice

that she intended to exempt the equipment’s full value, even if that

amount turned out to be more than the dollar amount she declared,

and more than the Code allowed.272

Thus, according to Reilly, Schwab should have, but did not, ob-

ject to her exemption in time, and the full value of the equipment

was exempt.273

Reilly asserted that her sentimental attachment to

the equipment, which was purchased for Reilly by her parents,

was so great that she would dismiss her bankruptcy case before

allowing the equipment to be sold at auction.274

The bankruptcy

court agreed with Reilly and denied Schwab’s motion to auction

267. See 560 U.S. ___, 130 S. Ct. 2652, 2659 (2010).




271. Id. at ___, 130 S. Ct. at 2658 (citation omitted).



274. Id. at ___, 130 S. Ct. at 2658. Reilly, in fact, filed a conditional motion to dismiss

her case in the event the bankruptcy court granted Schwab’s motion to auction the equip-

ment. See id. at ___, 130 S. Ct. at 2659 (citing In re Reilly, 403 B.R. 336 (Bankr. M.D. Pa.

2006)).



the equipment, and thereafter, both the district court and the

Third Circuit affirmed the bankruptcy court’s ruling against

Schwab on appeal.275

In ruling against Schwab, the Third Circuit construed the Su-

preme Court’s prior decision in Taylor v. Freeland & Kronz276

to

stand for the “unstated premise . . . that a debtor who exempts

the entire reported value of an asset is claiming the full amount,

whatever it turns out to be.”277

The result of the Third Circuit’s

decision was that Reilly was granted “the equivalent of an in-kind

interest in her business equipment, even though the value of that

exemption exceeded the amount that Reilly declared on Schedule

C and the amount that the Code allowed her to withdraw from

the bankruptcy estate.”278

Reilly argued on appeal that “where, as here, a debtor equates

the total value of her claimed exemptions in a certain asset . . .

with her estimate of the asset’s market value . . . she establishes

the ‘property claimed as exempt’ as the full value of the asset,

whatever that turns out to be.” 279

Schwab did not dispute that the

way Reilly filled out schedules B and C put him on notice

that Reilly “equated the total value of her claimed exemptions in

the equipment . . . with the equipment’s market value.”280

Schwab’s essential argument on appeal was that such “‘identical

275. See id. at ___, 130 S. Ct. at 2659 (citing In re Reilly, 403 B.R. 336; In re Reilly, 534

F.3d 173 (3d Cir. 2008)).

276. 503 U.S. 638, 644 (1992) (finding important that the debtor had listed “unknown”

for both the value of the asset and the value of the claimed exemption with respect to

whether interested parties were on notice for objection purposes of the debtor’s intent to

exempt the full value of the property).

277. In re Reilly, 534 F.3d at 179 (quoting Allen v. Green (In re Green), 31 F.3d 1098,

1100 (11th Cir. 1994)) (internal quotation marks omitted). The Supreme Court repudiated

such an interpretation of Taylor, explaining first that “[i]n Taylor, the question concerned

a trustee’s obligation to object to the debtor’s entry of a ‘value claimed exempt’ that was

not plainly within the limits the Code allows. In this case, the opposite is true.” Schwaab,

560 U.S. at ___, 130 S. Ct. at 2666. The Supreme Court then clarified that Taylor does not

rest on what the Third Circuit described as an “unstated premise:”

Taylor does not rest on this premise. It establishes and applies the straight-

forward proposition that an interested party must object to a claimed exemp-

tion if the amount the debtor lists as the “value claimed exempt” is not within

statutory limits, a test the value ($ unknown) in Taylor failed, and the values

($8,868 and $1,850) in this case pass.

Id. at ___, 130 S. Ct. at 2666.

278. Schwaab, 560 U.S. at ___, 130 S. Ct. at 2659 (citing In re Reilly, 534 F.3d at 178–

79).


280. Id. at ___, 130 S. Ct. at 2661.



listing [did not] put [him] on notice that Reilly intended to ex-

empt the property fully,’ regardless whether its value exceeded

the exemption limits the code prescribes.’”281

Schwab premised his

argument on his contention that “the Code defines the ‘property’

Reilly claimed as exempt under § 522(l) as an ‘interest’ whose

value cannot exceed a certain dollar amount.”282

Viewing Reilly’s

schedules in light of these Code provisions, Schwab asserted “that

Reilly’s claimed exemption was facially unobjectionable because

the ‘property claimed as exempt’ (i.e., two interests in her busi-

ness equipment worth $8,868 and $1,850, respectively) is proper-

ty Reilly was clearly entitled to exclude from her estate under the

Code provisions she referenced [in Schedule C].”283

The Supreme Court agreed with Schwab’s statutory interpreta-

tion and, in a passage that reveals how the Supreme Court ap-

proaches statutory construction issues under the Bankruptcy

Code, carefully paraded through § 522 to explain its reasoning:

The portion of § 522(l) that resolves this case is not, as Reilly asserts,

the provision stating that the “property claimed as exempt on

[Schedule C] is exempt” unless an interested party objects. Rather, it

is the portion of § 522(l) that defines the target of the objection,

namely, the portion that says Schwab has a duty to object to the “list

of property that the debtor claims as exempt under subsection (b).”

That subsection, § 522(b), does not define the “property claimed as

exempt” by reference to the estimated market value on which Reilly

and the Court of Appeals rely. Section 522(b) refers only to property

defined in § 522(d), which in turn lists 12 categories of property that

a debtor may claim as exempt. As we have recognized, most of these

categories (and all of the categories applicable to Reilly’s exemptions)

define the “property” a debtor may “clai[m] as exempt” as the debt-

or’s “interest”—up to a specified dollar amount—in the assets de-

scribed in the category, not as the assets themselves. Viewing Reil-

ly’s form entries in light of this definition, we agree . . . that Schwab

had no duty to object to the property Reilly claimed as exempt (two

interests in her business equipment worth $1,850 and $8,868) be-

cause the stated value of each interest, and thus of the “property

claimed as exempt,” was within the limits the Code allows. . . . The

Court of Appeals’ contrary holding not only fails to account for the

Code’s definition of the “property claimed as exempt.” It also fails to

account for the provisions in § 522(d) that permit debtors to exempt

certain property in kind or in full regardless of value. We decline to

281. Id. at ___, 130 S. Ct. at 2661 (quoting In re Reilly, 534 F.3d at 178) (second altera-

tion in original).





construe Reilly’s claimed exemptions in a manner that elides the dis-

tinction between these provisions and provisions such as [those that

govern Reilly’s exemptions in the equipment], particularly based up-

on an entry on Schedule C—Reilly’s estimate of her equipment’s

market value—to which the Code does not refer in defining the

“property claimed as exempt.”284

The Supreme Court sided with Schwab and rejected Reilly’s

arguments because such arguments defined “the target of a trus-

tee’s objection—the ‘property claimed as exempt’—based on lan-

guage in Schedule C and dictionary definitions of ‘property,’ that

the definition in the Code itself overrides.”285

The Court also sided

with Schwab on policy grounds:

We agree that “exemptions in bankruptcy cases are part and parcel

of the fundamental bankruptcy concept of a ‘fresh start.’” We disa-

gree that this policy required Schwab to object to a facially valid

claim of exemption on pain of forfeiting his ability to preserve for the

estate any value in Reilly’s business equipment beyond the value of

the interest she declared exempt. This approach threatens to convert

a fresh start into a free pass.286

The majority opinion ended with an instruction guide for debtors

who wish to exempt the full fair market value of an asset:

Where, as here, it is important to the debtor to exempt the full mar-

ket value of the asset or the asset itself, our decision will encourage

the debtor to declare the value of her claimed exemption in a manner

that makes the scope of the exemption clear, for example, by listing

the exempt value as “full fair market value (FMV)” or “100% of

FMV.” Such a declaration will encourage the trustee to object

promptly to the exemption if he wishes to challenge it and preserve

for the estate any value in the asset beyond relevant statutory lim-

its. If the trustee fails to object, or if the trustee objects and the ob-

jection is overruled, the debtor will be entitled to exclude the full

value of the asset. If the trustee objects and the objection is sus-

tained, the debtor will be required either to forfeit the portion of the

exemption that exceeds the statutory allowance, or to revise other

exemptions or arrangements with her creditors to permit the exemp-

tion.287

The ultimate outcome in Schwab—that an interested party

need not object to facially valid exemptions—is consistent with

the dissent’s admonishment that “forms, rules, treatise excerpts,

284. Id. at ___, 130 S. Ct. at 2661–63 (internal footnotes and citations omitted).

285. Id. at ___, 130 S. Ct. at 2662 (internal footnote and citation omitted).

286. Id. at ___, 130 S. Ct. at 2667 (internal citations omitted).

287. Id. at ___, 130 S. Ct. at 2668 (internal footnotes and citation omitted).



and policy considerations . . . must be read in light of the Bank-

ruptcy Code provisions that govern this case, and must yield to

those provisions in the event of conflict.”288

XII. FINAL ORDERS

In McDow v. Dudley, the Fourth Circuit held that an order

denying a motion to dismiss a debtor’s Chapter 7 bankruptcy case

as abusive under § 707(b) of the Bankruptcy Code is a final and

appealable order under 28 U.S.C. § 158(a).289

In Dudley, the debt-

ors filed a petition under Chapter 13 of the Bankruptcy Code,

which they subsequently converted to a case under Chapter 7.290

The United States trustee then filed a motion to dismiss the

Chapter 7 case under § 707(b), asserting that the debtors failed to

meet the requirements of the means test under § 707(b)(2) and

that the debtors’ financial circumstances indicated that they had

the ability to repay their creditors under § 707(b)(3).291

The bank-

ruptcy court denied the trustee’s motion to dismiss the case.292

The trustee appealed the bankruptcy court’s ruling to the district

court, which dismissed the appeal for lack of subject matter juris-

diction holding that the order was not “final” within the meaning

of 28 U.S.C. § 158(a)(1).293

The Fourth Circuit vacated the district court’s dismissal of the

appeal.294

The court noted that “the concept of finality in bank-

ruptcy cases has traditionally been applied in a more pragmatic

and less technical way . . . than in other situations.”295

The court

explained that, “because of the special nature of bankruptcy pro-

ceedings, which often involve multiple parties, claims, and proce-

dures,” postponing the review of rulings on discrete issues could

waste significant time and judicial resources.296

Therefore, “‘or-

288. Id. at ___, 130 S. Ct. at 2660 n.5 (internal citation omitted).

289. 662 F.3d 284, 289 (4th Cir. 2011).

290. Id. at 285.

291. Id. at 285–86.

292. Id. at 286 (citing McDow v. Dudley (In re Dudley), 405 B.R. 790, 801 (W.D. Va.

2009)).

293. Id. (citing McDow v. Dudley, 428 B.R. 686, 688–89 (W.D. Va. 2010)).

294. Id. at 285.

295. Id. at 287 (quoting Gold v. Guberman (In re Computer Learning Ctrs. Inc.), 407

F.3d 656, 660 (4th Cir. 2005) (internal quotation marks and additional citations omitted)).

296. Id. at 287 (citing A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1009 (4th Cir. 1986);

Bourns v. Northwood Props., LLC, 509 F.3d 15, 21 (1st Cir. 2007)).



ders in bankruptcy cases may be immediately appealed if they fi-

nally dispose of discrete disputes within the larger case.’”297

The court then held that orders denying motions to dismiss un-

der § 707(b) constitute orders disposing of just such a discrete is-

sue.298

The court distinguished motions to dismiss under § 707(b)

from motions to dismiss under other provisions in the Bankruptcy

Code, noting the relatively short time frame within which a mo-

tion to dismiss under this section must be filed.299

Under § 704(b),

the United States trustee must review whether a Chapter 7 case

is abusive as a mandatory threshold question in every case filed

under Chapter 7 and must then file a statement regarding his

conclusion within ten days of the meeting of creditors.300

Other

motions to dismiss, in contrast, such as certain motions under

§ 1112(b) or Federal Rules of Civil Procedure, Rule 12(b), may be

brought throughout the bankruptcy case.301

Given these timelines,

the court found that a trustee’s motion to dismiss under § 707(b)

constitutes a discrete dispute that is finally resolved when a

bankruptcy court denies the trustee’s motion, thus rendering the

court’s order appealable under 28 U.S.C. § 158(a)(1).302

XIII. STERN V. MARSHALL—POWERS OF THE COURT

By far, the Supreme Court’s 2011 decision in Stern v. Mar-

shall303

(authored by Chief Justice Roberts) has garnered more at-

tention from the bankruptcy bench and bar than any other deci-

sion from any court in recent years.304

This is because Stern

marks the first time in the past thirty years that the Supreme

Court has addressed the constitutionality of the bankruptcy judi-

cial system in the United States, and the Supreme Court’s Stern

decision, some might argue, drastically limits a bankruptcy

297. Id. (citing In re Computer Learning Ctrs. Inc., 407 F.3d at 660).

298. Id. at 290.

299. Id. at 289.

300. Id. at 288 (citing 11 U.S.C. § 704(b)(1)(A) (2006 & Supp. IV 2010)).

301. See id. at 289.

302. Id.

303. 564 U.S. ___, 131 S. Ct. 2594 (2011).

304. See Katie Drell Grissel, Stern v. Marshall—Digging for Gold and Shaking the

Foundation of Bankruptcy Courts (or Not), 72 LA. L. REV. 647, 648 (2012).



judge’s constitutional authority to adjudicate causes of action the

debtor may have against creditors or other parties.305

The procedural history of Stern, which arose from the bank-

ruptcy case of Anna Nicole Smith, is quite complicated—in fact,

the Supreme Court likened it to the Jarndyce suit in Charles

Dickens’s Bleak House.306

It suffices to understand that Anna Ni-

cole filed a bankruptcy petition in California; the son of Anna Ni-

cole’s late husband filed a complaint and proof of claim in Anna

Nicole’s bankruptcy case asserting that Anna Nicole and her law-

yers had defamed him; and Anna Nicole filed a counterclaim

against the son for tortious interference, alleging that the son

fraudulently induced Anna Nicole’s late husband (one of the rich-

est men in Texas) to exclude Anna Nicole from his living trust

and will.307

Though Stern involves other interesting issues, the

most noteworthy issue in Stern was whether the bankruptcy

court had statutory and constitutional authority to enter a final

judgment on Anna Nicole’s counterclaim.308

With regard to the bankruptcy court’s statutory authority, the

Supreme Court had to decide whether Anna Nicole’s counterclaim

was a “core” matter under 28 U.S.C. § 157, which authorizes dis-

trict courts to refer bankruptcy matters to bankruptcy courts and

authorizes a bankruptcy court to enter final judgments on “core”

matters and to submit proposed findings and conclusions to the

district court on non-core matters.309

Because Anna Nicole’s coun-

terclaim was a “counterclaim[] by the estate against persons fil-

ing claims against the estate,” it was a “core” proceeding under 28

U.S.C. § 157(b)(2)(C).310

The son argued that the bankruptcy court

nonetheless was not statutorily authorized to enter a final judg-

ment on Anna Nicole’s counterclaim because 28 U.S.C. § 157

could be read to allow “a bankruptcy judge [to] enter a final

judgment on a core proceeding only if that proceeding also

305. See Med. Educ. & Health Servs., Inc. v. Indep. Mayaguez (In re Med. Educ. &

Health Servs., Inc.), 459 B.R. 527, 548 (Bankr. D.P.R. 2011).

306. Stern, 564 U.S. at ___, 131 S. Ct. at 2600 (citing Charles Dickens, Bleak House, in

1 WORKS OF CHARLES DICKENS 4–5 (1891)).


308. See id. at ___, 131 S. Ct. at 2604–05, 2608.

309. Id. at ___, 131 S. Ct. at 2603, 2604 (quoting 11 U.S.C. §§ 157(b)(1), (2)(C), (2006))

(footnote omitted).

310. Id. at ___, 131 S. Ct. at 2604 (quoting 28 U.S.C. § 157(b)(2)(C)) (internal quotation

marks omitted).



‘aris[es] in’ a Title 11 case or ‘aris[es] under’ Title 11 itself.”311

The

Supreme Court rejected that argument and held that there is no

such thing as a core matter that neither arises under Title 11 nor

arises in a case under a Title 11 of the United States Code, which

was the erroneous assumption underpinning the son’s interpreta-

tion of 28 U.S.C. § 157.312

Rather, the Supreme Court explained

that a core matter must be an “arising” proceeding.313

Although the Supreme Court held that the bankruptcy court

had statutory authority over Anna Nicole’s counterclaim, it none-

theless held that the bankruptcy court lacked constitutional au-

thority over the counterclaim under separation of powers princi-

ples.314

The Supreme Court started its constitutional analysis by

explaining that Article III, Section 1 of the United States Consti-

tution provides that the “‘judicial Power of the United States,

shall be vested in one supreme Court, and in such inferior Courts

as the Congress may from time to time ordain and establish.’”315

The judges of Article III courts “‘shall hold their Offices during

good Behavior’ and ‘receive for their Services[] a Compensation[]

[that] shall not be diminished’ during their tenure.”316

The Su-

preme Court further explained that

[U]nder “the basic concept of separation of powers . . . that flow[s]

from the scheme of a tripartite government” adopted in the Constitu-

tion, “the ‘judicial power of the United States’ . . . can no more be

shared” with another branch than “the Chief Executive, for example,

can share with the Judiciary the veto power, or the Congress share

with the Judiciary the power to override a Presidential veto.”317

Applying separation of powers principles, the Supreme Court

held that the bankruptcy court’s exercise of “judicial power” over

Anna Nicole’s counterclaim was unconstitutional because, among

other reasons, a bankruptcy judge is not an Article III judge—

311. Id. at ___, 131 S. Ct. at 2604 (second and third alterations in original).

312. See id. at ___, 131 S. Ct. at 2604–05.

313. Id. at ___, 131 S. Ct. at 2605 (“[C]ore proceedings are those that arise in a bank-

ruptcy case or under Title 11.”).

314. See id. at ___, 131 S. Ct. at 2608 (quoting N. Pipeline Constr. Co. v. Marathon

Pipeline Co., 458 U.S. 50, 58 (1982) (plurality opinion); U.S. Const. art. III).

315. See id. at ___, 131 S. Ct. at 2608 (citation omitted).

316. See id. at ___, 131 S. Ct. at 2608 (alterations in original) (citation omitted).

317. Id. at ___, 131 S. Ct. at 2608 (quoting United States v. Nixon, 418 U.S. 683, 704

(1974)) (alterations in original).



bankruptcy judges “enjoy neither tenure during good behavior

nor salary protection.”318

The Supreme Court ultimately held that

Article III of the Constitution provides that the judicial power of the

United States may be vested only in courts whose judges enjoy the

protections set forth in that Article. We conclude today that Con-

gress, in one isolated respect, exceeded that limitation in the Bank-

ruptcy Act of 1984. The Bankruptcy Court below lacked the constitu-

tional authority to enter a final judgment on a state law

counterclaim that is not resolved in the process of ruling on a credi-

tor’s proof of claim.319

Bankruptcy, district, and circuit courts continue to grapple

with Stern’s impact, and clear consensus on Stern’s reach has not

yet emerged.

XIV. LIENS AND SECURITY INTERESTS

In SunTrust Bank, N.A. v. Macky (In re McCormick), the

Fourth Circuit addressed the strong arm powers of a bankruptcy

trustee under § 544.320

The debtors owned two contiguous tracts of

land (“Tract I” and “Tract II”), on which SunTrust held deeds of

trust.321

While SunTrust properly recorded its lien on Tract II in

the Parcel Identifier Number (“PIN”) Index used as the official

real property recording index in Orange County, North Carolina,

it failed to properly record its lien on Tract I.322

The bankruptcy

trustee sought to avoid the lien held by SunTrust on Tract I un-

der § 544(a)(3) because a search of the index on the petition date

would not have disclosed the existence of SunTrust’s lien as the

lien had not been properly recorded on the PIN Index.323

SunTrust

argued that the trustee had constructive knowledge of the lien

because a competent title searcher would have reviewed the deed

of trust on Tract II and found reference to SunTrust’s lien on

Tract I and would have found reference to the lien on Tract I in

the unofficial grantor/grantee index also maintained by Orange

County.324

318. See id. at ___, 131 S. Ct. at 2601, 2608.

319. See id. at ___, 131 S. Ct. at 2620.

320. See 669 F.3d 177, 178 (4th Cir. 2012).

321. Id.

322. Id. at 179.

323. Id.

324. Id.



The court held that, under § 544(a)(3), the trustee’s ability to

avoid the lien is determined by whether “a bona fide purchaser of

the property would have taken the property subject to the lien”

under state law.325

A trustee, therefore, is imputed only with the

knowledge of a bona fide purchaser under state law without re-

gard to any actual knowledge of the trustee.326

Analyzing North

Carolina’s recording system, the court concluded that under

North Carolina law, if a prior lien is not recorded properly, a sub-

sequent purchaser can take the property as if no lien exists even

if the purchaser has actual knowledge that an earlier lien has

been created.327

The Court thus held that any constructive

knowledge held by the trustee was irrelevant.328

As the lien was

not properly recorded on the PIN Index, under North Carolina

law the trustee’s status as a hypothetical bona fide purchaser

permitted him to avoid SunTrust’s lien.329

In Botkin v. DuPont Community Credit Union, the debtor

owned residential property with a market value of $22,500 sub-

ject to a purchase money deed of trust in the amount of $24,124

and a judicial lien in the amount of $9800.330

Although the debtor

had $2777 in remaining homestead exemptions under Virginia

Code section 34-14, she did not claim a homestead exemption for

any portion of her real property.331

The debtor filed a motion to

avoid the judicial lien under § 522(f).332

The bankruptcy court de-

nied the debtor’s motion on the ground that the debtor must ac-

tually claim an exemption to avoid a judicial lien under § 522(f).333

On appeal, the district court reversed the decision of the bank-

ruptcy court, holding that the debtor need not actually claim an

exemption to utilize § 522(f).334

The judicial lien creditor, DuPont

Community Credit Union, appealed the district court’s reversal to

the Fourth Circuit.335

325. Id. at 180 (quoting 11 U.S.C. § 544(a)(3) (2006)).

326. Id.

327. Id. at 181, 182 (quoting Hill v. Pinelawn Mem’l Park, Inc., 282 S.E.2d 779, 782

(N.C. 1981); Turner v. Glenn, 18 S.E.2d 197, 201 (N.C. 1942)).

328. See id. at 183.

329. Id. at 184.

330. 650 F.3d 396, 397 (4th Cir. 2011).

331. Id.

332. Id.

333. Id. at 398.

334. Id.

335. Id.



Section 522 provides that a “debtor may avoid the fixing of a

[judicial] lien on an interest of the debtor in property to the ex-

tent that such lien impairs an exemption to which the debtor

would have been entitled.”336

A lien impairs an exemption

to the extent that the sum of (i) the lien; (ii) all other liens on the

property; and (iii) the amount of the exemption that the debtor could

claim if there were no liens on the property; exceeds the value that

the debtor’s interest in the property would have in the absence of

any liens.337

Dupont conceded that this mathematical test set forth in

§ 522(f)(2) was satisfied.338

Analyzing the plain language of the statute, the court affirmed

the ruling of the district court that a debtor need not actually

claim an exemption to avail itself of § 522(f).339

The court noted

that the language of § 522(f)(2) refers to “‘the amount of the ex-

emption that the debtor could claim if there were no liens on the

property . . . [thus reflecting] § 522’s focus not on any actual claim

of exemption, but rather on the hypothetical exemption that the

debtor would have been entitled to in the absence of the lien.’”340

Accordingly, debtors do not need to claim an exemption as a pre-

condition of avoiding a lien under § 522(f).341

The court in Pierce v. New Generations Federal Credit Union

(In re Pierce) addressed whether Chapter 13 debtors may strip off

a lien that had been treated as fully secured in the debtors con-

firmed plan.342

The debtors’ real property was encumbered by two

liens held by Bank of America and New Generations Federal

Credit Union, respectively.343

The debtors’ confirmed plan elected

to treat both liens as fully secured.344

After confirmation, however,

the debtors filed an adversary proceeding seeking to strip off the

second priority lien held by New Generations.345

336. Id. at 397–98 (quoting 11 U.S.C.A. § 522(f)(1) (West 2004 & Supp. 2010)).

337. Id. at 399 (citing 11 U.S.C.A.§ 522(f)(2)(A) (West 2004 & Supp. 2010)).

338. Id.

339. Id. at 400.

340. Id. (internal citation and footnote omitted).

341. Id.

342. Nos. 10-35404-KRH, APN 11-03288-KRH, 2012 WL 1903263, at *1 (Bankr. E.D.

Va., May 24, 2012).

343. Id.

344. Id. at *3.

345. Id. at *1.



While finding that the amount of the first lien exceeded the

value of the debtors’ property and that New Generations’ lien

therefore was completely unsecured, the court nevertheless dis-

missed the debtors’ adversary proceeding because the confirmed

Chapter 13 plan did not propose to modify New Generations’

lien.346

The court held that while § 506(d) provides that a lien is

void to the extent that it does not secure a claim against a debtor

that is an allowed secured claim, this section is not self-

executing.347

Rather, the authority to avoid a lien comes through §

1322(b)(2) and the plan confirmation process.348

The court thus

found that a debtor only may pursue an adversary proceeding to

avoid a lien after confirmation of a Chapter 13 plan allowing for

the modification.349

Additionally, the court held that the Chapter

13 plan’s treatment of New Generations’ claim as fully secured

had res judicata effect that prevented the modification of the

lien.350

Finding that plan confirmation was a final judgment bind-

ing both the debtors and New Generations to the terms of the

plan, the court concluded that the debtors could not initiate an

adversary proceeding to strip the lien unless the debtors first

proposed to do so in a modified plan.351

In In re Nguyen, a creditor opposed the debtor’s attempts to

avoid a judgment lien pursuant to § 522(f) on the ground that the

debtor did not have equity in the property, citing the case of In re

Sheaffer.352

The court rejected this argument, holding that the

1994 amendment to § 522(f), which added the mathematical for-

mula for calculating whether a lien would impair an exemption to

which the debtor would be entitled, was specifically enacted to

permit a debtor to avoid a judicial lien on property in which the

346. Id. at *1, *3, *4 (citing Dewsnup v. Timm, 502 U.S. 410, 417 (1992); Ryan v.

Homecomings Fin. Network, 253 F.3d 778, 779 (4th Cir. 2001)).

347. Id. at *3.

348. Id.

349. Id.

350. Id. (citations omitted).

351. Id.

352. No. 11-15308-BFK, 2011 WL 4915884, at *1 (Bankr. E.D. Va. Oct. 17, 2011) (citing

Sheaffer v. Marshall Nat’l Bank & Trust Co. (In re Sheaffer), 159 B.R. 758, 760 (Bankr.

E.D. Va. 1993), superseded by statute, Bankruptcy Reform Act of 1994, Pub. L. No. 103-

394, 108 Stat. 22).



debtor lacks equity.353

The earlier decision in In re Sheaffer was

thus overruled and is no longer applicable.354

In Peterson v. United BankShares, Inc. (In re Peterson), the

Chapter 13 debtor sought to strip off a second priority lien on the

debtor’s primary residence held by United Bank, alleging that

there was no equity in the property to which the lien could at-

tach.355

While the parties agreed that the balance of the first lien

was $864,395.35, they disagreed with respect to the value of the

property.356

After weighing the valuation evidence presented by

both parties, the court determined that the property had a value

of $880,000 and, thus, that the debtor had approximately $15,600

equity in the property.357

The court noted that while a debtor may avoid a lien on proper-

ty that is not supported by any equity, § 1322(b)(2) prohibits a

court from modifying the rights of a creditor secured by a security

interest in the debtor’s principal residence.358

This prohibition in-

cludes bifurcating a partially secured claim into secured and un-

secured components.359

Accordingly, the court held that “a deed of

trust that is supported by even $1.00 of equity cannot be modi-

fied.”360

In Radlax Gateway Hotel, LLC v. Amalgamated Bank, the Su-

preme Court was called upon to determine whether a debtor may

cram down a Chapter 11 plan that proposes to sell free and clear

the encumbered assets of a secured creditor without giving the

creditor a right to credit bid.361

The debtors, owner of the Radisson

Hotel at the Los Angeles International Airport, filed a Chapter 11

plan proposing to dissolve and to sell substantially all of its assets

through an auction.362

The plan also provided that the secured

creditor could not use its debt to offset the purchase price and

353. Id. at *1–2 (quoting H.R. REP. NO. 103-835, at 52–54 (1994), reprinted in 1994

U.S.C.C.A.N. 3340, 3361–62).

354. See id. at *2–5.

355. 64 Collier Bankr. Cas. 2d (MB) 1667, 1667 (Bankr. E.D. Va. 2011).

356. Id. at 1668.

357. Id. at 1670–71.

358. Id. (citing 11 U.S.C. § 1322(b)(2) (2006); Nobelman v. Am. Sav. Bank, 508 U.S. 324

(1993)).

359. Id. at 1670 (citing 11 U.S.C. § 1322(b)(2); Nobleman, 508 U.S. 432).

360. Id. at 1671.

361. 566 U.S. ___, ___, 132 S. Ct. 2065, 2068 (2012).

362. Id. at ___, 132 S. Ct. at 2068, 2069.



must pay cash should it wish to bid on its assets.363

The debtors

sought to confirm this plan over the secured creditor’s objection

under § 1129(b)(2)(A).364

Under § 1129(b)(2)(A), a plan is “fair and equitable” with re-

spect to a dissenting secured creditor if the plan provides that: (i)

the creditor either retains its lien and receives deferred cash

payments totaling at least the allowed amount of its claim; (ii) the

property is sold free and clear of the creditor’s lien with the credi-

tor to receive a replacement lien on the proceeds of the sale, sub-

ject to the creditor’s right to credit bid set forth in § 363(k); or (iii)

the creditor will realize the “indubitable equivalent” of its claim.365

The debtors sought to confirm the plan under § 1129(b)(2)(A)(iii),

asserting that the creditor would receive the “indubitable equiva-

lent” of its claim in the form of cash generated by the auction.366

The Court held that the debtors’ plan must permit the creditor

the right to credit bid at the sale of its encumbered assets.367

The

Court stated that well-established principles of statutory inter-

pretation hold “that the specific governs the general,” particularly

where “Congress has enacted a comprehensive scheme and has

deliberately targeted specific problems with specific solutions.”368

Looking at the statute in question, the court found that “clause

(ii) is a detailed provision that spells out the requirements for

selling collateral free of liens, while clause (iii) is a broadly word-

ed provision that says nothing about such a sale.”369

Although

clause (iii) may be broad enough to include the issue at hand,

clause (iii) “‘will not be held to apply to a matter specifically dealt

with’ in clause (ii).”370

Accordingly, as clause (ii) squarely address-

es plans under which the property is sold free and clear of a credi-

363. Id. at ___, 132 S. Ct. at 2069. Offsetting one’s debt against the purchase price of

such property is known as “credit bidding.” Id. at ___, 132 S. Ct. at 2069.

364. Id. at ___, 132 S. Ct. at 2069.

365. Id. at ___, 132 S. Ct. at 2070 (citing 11 U.S.C. § 1329(b)(2)(A) (2006)).


367. Id. at ___, 132 S. Ct. at 2073.

368. Id. at ___, 132 S. Ct. at 2070–71 (quoting Morales v. Trans World Airlines, Inc.,

504 U.S. 374, 384 (1992)) (internal quotation marks omitted) (citing Varity Corp. v. Howe,

516 U.S. 489, 519 (1996) (Thomas, J., dissenting)).

369. Id. at ___, 132 S. Ct. at 2071.

370. Id. at ___, 132 S. Ct. at 2071–72 (quoting D. Ginsburg & Sons, Inc. v. Popkin, 285

U.S. 204, 208 (1932)).



tor’s lien, the debtor may not apply the catchall provision in

clause (iii) to deny the creditor the right to credit bid.371

The debtors in In re Martin owned residential real property

with a value of $62,052.60 subject to a claim in the amount of

$132,429.97 secured by a deed of trust on both the real property

and the debtor’s interest in an escrow account.372

Asserting that

the anti-modification provisions of § 1322(b)(2) did not apply be-

cause the debtors’ property was secured by an interest in both

their primary residence and the escrow account, the debtors filed

a Chapter 13 plan seeking to bifurcate the secured loan, to

reamortize $2527.17 in pre-petition mortgage arrears, and to

reamortize the secured portion of the loan over a term of 108

months at 3.5 percent interest.373

The court found that the secured creditor’s lien on the debtors’

interest in the escrow account caused the claim to not be “secured

only by a security interest in real property that is the debtor’s

principal residence,” and that the anti-modification provision of

§ 1322(b)(2) did not apply.374

The court nevertheless denied con-

firmation of the debtors’ plan.375

While the debtors could bifurcate

the secured creditor’s claim, the debtors only could extend pay-

ments on the secured portion of the claim beyond the life of the

plan if the plan provided for the curing of any default within a

reasonable time and the maintenance of payments while the case

was pending.376

The debtors’ proposed plan sought to cure the de-

fault by reamortizing the pre-petition arrearage over 108 months,

which the court concluded was not within a reasonable time.377

The court further held that if the debtors sought to modify the

terms of the loan with the secured creditor, the full amount of the

secured portion of the loan must be paid over the life of the

plan.378

Should the debtors seek to extend payments of the se-

371. Id. at ___, 132 S. Ct. at 2072.

372. 444 B.R. 538, 541–42 (Bankr. M.D.N.C. 2011).

373. Id.

374. Id. at 543 (quoting 11 U.S.C. § 1322(b)(2) (2006)) (internal quotation marks omit-

ted).

375. See id.

376. Id. at 543–44 (citing In re Plourde, 402 B.R. 488, 491 (Bankr. D.N.H. 2009); In re

Veliz, No. 08-13292, 2009 WL 3418638, at *1 (Bankr. D.R.I. Oct. 16, 2009)).

377. Id. at 542, 543.

378. Id. (citing In re Hayes, No. 10-81248C-13D, 2011 WL 249450 (Bankr. M.D.N.C.

Jan. 24, 2011); In re Valdes, No. 09-26712-BKC-AJC, 2010 WL 3956814, at *4 (Bankr. S.D.

Fla. Oct. 4, 2010); In re Plourde, 402 B.R. at 491; In re McGregor, 172 B.R. 718, 721



cured debt past the conclusion of the plan, the debtors would have

to do so with the terms and interest rate set forth in the original

mortgage agreement.379

XV. NON-DEBTOR RELEASES

Chapter 11 debtors and their professionals, officers, directors,

and affiliates often seek a release of liability in any proposed

Chapter 11 plan—these releases are referred to as “non-debtor re-

leases.” The Fourth Circuit had occasion in Behrmann v. National

Heritage Foundation, Inc., to confirm that non-debtor releases are

not per se impermissible under the Bankruptcy Code (although

such releases “should be granted cautiously and infrequently”)

and to provide guidance to bankruptcy and district courts regard-

ing the standards for approval of such non-debtor releases.380

The Fourth Circuit first reaffirmed its prior decision arising

out of the A.H. Robins bankruptcy case (which resulted from A.H.

Robins’s mass tort liability for the Dalkon Shield contraception

device) approving non-debtor releases under § 524(e) of the Bank-

ruptcy Code: “[W]e have rejected the notion that 11 U.S.C.

§ 524(e) forecloses bankruptcy courts from releasing and enjoin-

ing causes of action against nondebtors. . . . [In A.H. Robins,] we

permitted the bankruptcy court to enjoin [suits against nondebt-

ors] on grounds of equity.”381

Next, the court explained that

a bankruptcy court need not find a precise fit between the circum-

stances found in A.H. Robins and the case before it as a precondition

to granting equitable relief. Rather, whether a court should lend its

aid in equity to a Chapter 11 debtor will turn on the particular facts

and circumstances of the case . . . .382

To aid bankruptcy and district courts in evaluating whether the

facts and circumstances of a given case supported approval of

non-debtor releases, the Fourth Circuit endorsed the standards

(Bankr. D. Mass. Oct. 21, 1994)) (footnote omitted).

379. Id. (citing In re Veliz, 2009 WL 3418638, at *1).

380. 663 F.3d 704, 712 (4th Cir. 2011) (citing Deutsche Bank AG v. Metromedia Fiber

Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 142 (2d Cir. 2005);

Lacy v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648, 657–58 (6th Cir.

2002); Gillman v. Cont’l Airlines (In re Cont’l Airlines), 203 F.3d 203, 212–13 (3d Cir.

2000)).

381. Id. at 710 (citing Menard-Sanford v. Mabey (In re A.H. Robins Co.), 850 F.2d 694,

701 (4th Cir 1989) (conferring equitable powers on court)).

382. Id. at 711.



set forth in two other decisions: the Sixth Circuit’s decision in In

re Dow Corning Corp.383

and the Bankruptcy Court for the District

of Maryland’s decision in In re Railworks Corp.384

The Fourth Cir-

cuit explained that “we are satisfied to leave to a bankruptcy

court the determination of which factors may be relevant in a

specific case . . . .”385

However, the Fourth Circuit admonished

bankruptcy and district courts that they must “make specific fac-

tual findings in support of [the] decision to grant equitable re-

lief.”386

In National Heritage, the bankruptcy court had not made

sufficient factual findings, and the Fourth Circuit remanded for

the bankruptcy court to make additional findings.387

XVI. PROPERTY OF THE ESTATE

A big issue for consumer debtors is what will happen to their

vehicles if they file bankruptcy. The Fourth Circuit in Daim-

lerChrysler Financial Services Americas, LLC v. Jones (In re

Jones),388

clarified this issue, at least with respect to the proce-

383. Id. at 711–12 (quoting In re Dow Corning Corp., 280 F.3d at 658). The Dow Corn-

ing factors are:

(1) There is an identity of interests between the debtor and the third party,

usually an indemnity relationship, such that a suit against the non-debtor is,

in essence, a suit against the debtor or will deplete the assets of the estate;

(2) The non-debtor has contributed substantial assets to the reorganization;

(3) The injunction is essential to reorganization, namely, the reorganization

hinges on the debtor being free from indirect suits against parties who would

have indemnity or contribution claims against the debtor; (4) The impacted

class, or classes, has overwhelmingly voted to accept the plan; (5) The plan

provides a mechanism to pay for all, or substantially all, of the class or clas-

ses affected by the injunction; (6) The plan provides an opportunity for those

claimants who choose not to settle to recover in full and; (7) The bankruptcy

court made a record of specific factual findings that support its conclusions.

In re Dow Corning Corp., 280 F.3d at 658 (citing In re A.H. Robins, 880 F.2d at 7901–02;

MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 92–94 (2d Cir. 1988); In re Cont’l

Airlines, 203 F.3d at 214).

384. Nat’l Heritage Found. Inc., 663 F.3d at 712 (citing Hoge v. Moore (In re Railworks

Corp.), 345 B.R. 529, 536 (Bankr. D. Md. 2006)). The Railworks Corp. factors are:

(1) overwhelming approval for the plan; (2) a close connection between the

causes of action against the third party and the causes of action against the

debtor; (3) that the injunction is essential to the reorganization; and (4) that

the plan of reorganization provides for payment of substantially all of the

claims affected by the injunction.

See id. (citing In re Railworks Corp., 345 B.R. at 536).

385. Id.

386. Id.

387. See id. at 713.

388. 591 F.3d 308 (4th Cir. 2010).



dural hurdles a debtor must meet to retain his car in bankruptcy.

If a debtor intends to retain the car, §§ 362(h) and 521(a)(6) of the

Bankruptcy Code require a debtor to file a statement of intention

setting forth either the intent to reaffirm the debt in a reaffirma-

tion agreement under 11 U.S.C. § 524(c) or the intent to redeem

the property by paying off the full amount of the lien under 11

U.S.C. § 722.389

Before BAPCPA was enacted in 2005, the Fourth

Circuit had recognized a third, so-called “ride-through” option:

even if a debtor did not reaffirm or redeem, the “ride-through op-

tion permitted Chapter 7 debtors who were current on their in-

stallment payments to continue making payments and retain col-

lateral after discharge . . . .”390

In Jones, the debtor, Mr. Jones, filed a statement indicating

that he would continue making his car payments but did not indi-

cate whether or not he intended to reaffirm or redeem the debt.391

Jones also did not timely redeem the car or execute a reaffirma-

tion agreement, and the bankruptcy court entered an order at the

lender’s request confirming that the automatic stay had termi-

nated so that the lender could repossess the vehicle based on the

default caused by the debtor’s bankruptcy filing (i.e., a default

under an ipso facto provision).392

After entry of that order, the

lender repossessed the vehicle.393

Jones and his wife (who was not a joint debtor but was a co-

owner of the vehicle with Jones) filed a lawsuit against the lender

in the bankruptcy court and obtained an injunction against the

sale of the vehicle and providing for the return of the vehicle to

the Joneses.394

The bankruptcy court, relying on the “ride-

through” option under which a Chapter 7 debtor like Jones may

keep the vehicle so long as payments remain current, held that

the lender had no right to repossess the vehicle even though

Jones did not timely reaffirm the debt or redeem the vehicle by

paying off the liens in full.395

The lender appealed to the district

court and won: the district court held that BAPCPA eliminated

389. Id. at 309 & n.1 (citing 11 U.S.C. §§ 362(h), 521(a)(2), 524(c), 722 (2006)).

390. Id. at 310 (citing Home Owners Funding Corp. of Am. v. Belanger (In re Belanger),

962 F.2d 345, 347–49 (4th Cir. 1992)).

391. Id. at 309.

392. Id. at 310.

393. Id.

394. Id.

395. Id. (citing In re Belanger, 962 F.2d at 347–49).



the ride-through option.396

The lender won again at the Fourth

Circuit; the Fourth Circuit agreed that BAPCPA abrogated the

Fourth Circuit’s prior ruling in Belanger that endorsed the ride-

through option.397

The Fourth Circuit’s analysis is straightforward and based on

the plain language of the applicable Bankruptcy Code sections as

they exist after BAPCPA. First, the court explained why it had

endorsed the ride-through option before BAPCPA:

In re Belanger analyzed the language of former § 521(2)(A), which

required a debtor to file a statement of intention which, “if applica-

ble,” indicated the debtor’s intent to either redeem the collateral or

reaffirm the debt secured by the collateral. We interpreted the lan-

guage “if applicable” to mean that the options of redeeming or reaf-

firming were not exclusive and, therefore, the property could ride

through the bankruptcy unaffected if the debtor chose to retain the

property and continue making payments.398

Next, the court explained that, while BAPCPA did not effect

material changes to former § 521(2)(A), BAPCPA did introduce

changes in other sections with a significant impact on the analy-

sis: “[F]ormer § 521(2)(C) has been amended as follows: ‘nothing

in subparagraphs (A) and (B) of this paragraph shall alter the

debtor’s or the trustee’s rights with regard to such property under

this title, except as provided in section 362(h).’”399

Section 362(h) in

turn provides in relevant part that the debtor must, “if retaining

such personal property [e.g., a vehicle], either redeem such per-

sonal property . . . [or] enter into [a reaffirmation] agreement

. . . .”400

Section 362(h) also provides that if a debtor fails to file the

required statement of intention, the stay terminates, and the

property is no longer property of the estate.401

In addition, the Fourth Circuit pointed out an entirely new sec-

tion added by BAPCPA that impacts the analysis:

Section 521(a)(6), added by BAPCPA, also evidences that the ride-

through option has been eliminated. That section provides that a

396. Id. (citing Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,

Pub. L. No. 109-8, 119 Stat. 23; Daimler Chrysler Fin. Servs., Ams. LLC v. Jones (In re

Jones), 397 B.R. 775, 787 (Bankr. S.D. W. Va. 2008).

397. Id. at 311–12 (citing Santos v. United States, 461 F.3d 886, 891 (7th Cir. 2006)).

398. Id. at 311 (citing In re Belanger, 962 F.2d at 345–47).

399. Id. (quoting 11 U.S.C. § 521(a)(2)(C) (2006)).

400. 11 U.S.C. § 362(h)(1)(A) (2006).

401. Id.



debtor may not retain possession of personal property which is sub-

ject to a secured claim unless the debtor either reaffirms the debt or

redeems the property, according to the debtor’s statement of inten-

tion required by §§ 521(a)(2) and 362(h), within 45 days of the first

meeting of creditors. This section further provides that if the debtor

fails to so act within the 45-day period, the stay is terminated, the

property is no longer considered part of the estate, and “the creditor

may take whatever action as to such property as is permitted by ap-

plicable nonbankruptcy law.”402

Thus, after BAPCPA and the Fourth Circuit’s decision in

Jones, an individual debtor in the Fourth Circuit has three op-

tions when it comes to a vehicle: (i) surrender it; (ii) keep it by

paying off the liens in full; or (iii) enter into a reaffirmation

agreement with the secured creditor.

XVII. PRO SE ACTIONS

It is widely accepted that courts will afford pro se parties con-

siderable leeway when enforcing pleading and other procedural

requirements. As recognized by the United States District Court

for the Eastern District of Virginia in Stewart v. HSBC Bank,

USA, however, this deference is not unlimited.403

In Stewart, the

pro se plaintiff filed a seventy-nine page complaint containing full

copies of court documents, generally incomprehensible allega-

tions, and very few facts.404

Noting the Supreme Court’s require-

ments in Bell Atlantic Corp. v. Twombly that a pleading contain

“‘a short and plain statement of the claim showing that the plead-

er is entitled to relief’” and more than “unadorned accusa-

tion[s],”405

the court found the plaintiff’s complaint to be woefully

inadequate and dismissed the case.406

“While pro se actions are to

be generously construed,” the court stated, “federal courts are not

required to ‘conjure up questions never squarely presented to

them.’”407

402. In re Jones, 591 F.3d at 311 (quoting 11 U.S.C. § 521(a)(7) (2006)).

403. No. 3:10CV586, 2010 WL 3522087, at *1 (E.D. Va. Sept. 3, 2010).

404. Id.

405. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing FED. R. CIV. P.

8(a)(2)).

406. Stewart, 2010 WL 3522087, at *1, *3 (citations omitted).

407. Id. at *1 (quoting Beaudett v. Hampton, 775 F.2d 1274, 1278 (4th Cir. 1985)).



XVIII. SINGLE ASSET REAL ESTATE

In In re Light Foot Group LLC, the Bankruptcy Court for the

District of Maryland held that a debtor that owned several con-

tiguous parcels of property containing seventeen housing units of

varying types was a single asset real estate entity as defined by

§ 101(51B) of the Bankruptcy Code.408

Section 101(51B) states:

The term “single asset real estate” means real property constituting

a single property or project, other than residential real property with

fewer than 4 residential units, which generates substantially all of

the gross income of a debtor who is not a family farmer and on which

no substantial business is being conducted by a debtor other than

the business of operating the real property and activities inci-

dental.”409

The debtor argued that the property did not qualify as single as-

set real estate because it had differing intended future uses for

each parcel of property, because none of the buildings on the

property contained more than four units, and because the debtor

also operated an affiliate company on the property that performed

repair work on the buildings.410

The court rejected each of the debtor’s arguments.411

First, the

court found that the only discussion of the various parcels in the

debtor’s plan of reorganization and cash flow projections attached

to the disclosure statement regarded rental income derived from

the property and did not indicate any other current or future in-

tended uses for the parcels.412

The court concluded that the only

business of the debtor was the generation of rental income from a

single property.413

Next, the court disagreed with the debtor’s in-

terpretation of § 101(51B), finding that the phrase “real property

constituting a single property or project,” other than residential

real property with fewer than four residential units, requires only

that the property as a whole contain four or more residential

units.414

Finally, the court dismissed the debtor’s argument that

the presence of its affiliated company on the property removes the

408. 66 Collier Bankr. Cas. 2d (MB) 1626, 1630–31 (Bankr. D. Md. 2011).

409. 11 U.S.C. § 101(51B) (2006 & Supp. IV 2010).

410. In re Light Foot Group LLC, 66 Collier Bankr. Cas. 2d (MB) at 1629–30.

411. Id.

412. Id. at 1629.

413. Id.

414. Id. at 1629–30 (quoting 11 U.S.C. § 101(51B)) (internal quotation marks omitted).



debtor from single asset real estate status.415

The court found that

this affiliate, which was engaged in the repair and installation of

HVAC systems, performed work for the debtor that was required

to meet the debtor’s obligations as a landlord and, therefore, was

incidental to the business.416

Accordingly, the court concluded that

the debtor was a single asset real estate under § 101(51B).417

XIX. TAX ISSUES

A decision involving both the Internal Revenue Code and the

Bankruptcy Code probably would rank on most lawyers’ top ten

list of un-sexiest decisions. But the Supreme Court’s five-to-four

decision on those statutory regimes in Hall v. United States, sexy

or not, likely will have a significant impact on tax and bankruptcy

planning for family farmers seeking relief in bankruptcy court

under Chapter 12 of the Bankruptcy Code.418

In general, a Chapter 12 plan of reorganization must provide

for payment in full of all priority claims,419

but as a result of a

change wrought by BAPCPA, a Chapter 12 debtor may treat cer-

tain governmental claims resulting from the disposition of farm

assets as unsecured, nonpriority claims that are dischargeable.420

This exception, however, applies only to claims that are “entitled

to priority under section 507” of the Bankruptcy Code.421

At issue

in Hall were post-petition taxes resulting from the Chapter 12

debtors’ (the Halls’) sale of their farm shortly after filing a bank-

ruptcy petition.422

The question was whether the IRS’s tax claim

was entitled to priority under § 507 as an administrative expense

on account of “‘tax[es] . . . incurred by the estate’” under § 503(b)

of the Bankruptcy Code.423

The Halls filed a proposed plan in which the tax claim would be

paid as a general unsecured claim to the extent funds were avail-

able to pay unsecured creditors, and any unpaid excess would be

415. Id. at 1630.

416. Id.

417. Id. at 1630–31.

418. See 566 U.S. ___, ___, 132 S. Ct. 1882, 1885–86 (2012).

419. Id. at ___, 132 S. Ct. at 1885 (citing 11 U.S.C. § 1222(a)(2) (2006)).

420. See id. at ___, 132 S. Ct. at 1885 (quoting 11 U.S.C. § 1222(a)(2)(A)).

421. Id. at ___, 132 S. Ct. at 1885 (quoting 11 U.S.C. § 1222(a)(2)(A)).

422. Id. at ___, 132 S. Ct. at 1885, 1886.

423. Id. at ___, 132 S. Ct. at 1886 (quoting 11 U.S.C. § 503(b)(1)(B)(i) (2006)).



discharged.424

The IRS objected and argued that the tax claim was

not “incurred by the estate” and was neither collectible nor dis-

chargeable in the Halls’ bankruptcy case.425

The bankruptcy court

agreed with the IRS and sustained the IRS’s objection to the

Halls’ proposed plan because a Chapter 12 estate is not a sepa-

rate taxable entity under the Internal Revenue Code.426

On appeal

to the district court, the district court reversed in favor of the

Halls because the district court disagreed with the bankruptcy

court’s reliance on Internal Revenue Code provisions to con-

strue § 503(b) of the Bankruptcy Code and because the district

court concluded that the legislative history of § 1222(a)(2)(A) was

intended to apply to post-petition taxes incurred by Chapter 12

debtors.427

On further appeal by the IRS to the Ninth Circuit, the

Ninth Circuit reversed the district court and affirmed the bank-

ruptcy court’s initial decision.428

The Halls then appealed to the

Supreme Court but were unsuccessful.429

First, the Supreme Court gave the phrase “incurred by the es-

tate” a “plain and natural reading” and held that the phrase re-

fers to “a tax for which the estate itself is liable.”430

The Supreme

Court then referred to provisions of the Internal Revenue Code

providing that a separate taxable estate is created when an indi-

vidual debtor files a Chapter 7 or Chapter 11 bankruptcy petition

but not when an individual debtor files a Chapter 12 or Chapter

13 bankruptcy petition.431

For the Supreme Court, these Internal

Revenue Code provisions

suffice to resolve this case: Chapter 12 estates are not taxable enti-

ties. [The Halls], not the estate itself, are required to file the tax re-

turn and are liable for the taxes resulting from their postpetition

farm sale. The postpetition federal income tax liability is not “in-

curred by the estate” and thus is neither collectible nor dischargea-

ble in the Chapter 12 plan.432

424. See id. at ___, 132 S. Ct. at 1886.

425. Id. at ___, 132 S. Ct. at 1886.

426. See id. at ___, 132 S. Ct. at 1886 (citing 26 U.S.C. §§ 1398, 1399 (2006)).

427. See id. at ___, 132 S. Ct. at 1886.

428. Id. (citing Hall v. United States, 617 F.3d 1161 (9th Cir. 2010)).

429. See id. at ___, 132 S. Ct. at 1893.

430. Id. at ___, 132 S. Ct. at 1887 (citing FCC v. AT&T Inc., 562 U.S. ___, ___, 131 S.

Ct. 1177, 1182 (2011)).

431. Id. at ___, 132 S. Ct. at 1887 (citing 26 U.S.C. §§ 1398(1), 1399, 6012(b)(4) (2006)).




Interestingly, only after construing the Internal Revenue Code

did the Court address whether its holding on the meaning of the

phrase “incurred by the estate” as used in the Bankruptcy Code

comported with other provisions of the Bankruptcy Code.433

The

Court examined § 346 from its inception in the 1978 enactment of

the Bankruptcy Code through its most recent amendment in

BAPCPA.434

The Court declared that § 346 “crystallized the con-

nection between the Bankruptcy Code and the IRC” because § 346

sets forth (and always has set forth) “a chapter-specific division of

tax liabilities between the estate and the debtor,” and, after

BAPCPA, even includes an express reference to the Internal Rev-

enue Code provisions discussed above.435

After a foray into analo-

gous Chapter 13 provisions and case law, the court summarized:

“We hold that the federal income tax liability resulting from [the

Halls’] postpetition farm sale is not ‘incurred by the estate’ under

§ 503(b) and thus is neither collectible nor dischargeable in the

Chapter 12 plan.”436

The result in Hall would have been entirely different if only the

Halls had sold their farm before they filed their Chapter 12 peti-

tion, because pre-petition taxes would have been subject to the

exception enacted by BAPCPA in § 1222(a)(2).437

Thus, after Hall,

a family farmer (and his tax and bankruptcy professionals) will

need to carefully consider the timing of any sales of farm assets in

connection with the filing of a Chapter 12 petition.

XX. TRUSTEES

In Spain v. Williams (In re Williams), the Bankruptcy Court

for the Eastern District of Virginia was asked to determine the

membership as well as to appoint a member to wind up the af-

fairs of a Virginia limited liability company (“LLC”) engaged in

contracting and construction projects.438

The adversary proceeding

in Spain originated in a Virginia circuit court when Sandra

433. Id. at ___, 132 S. Ct. at 1887.

434. See id. at ___, 132 S. Ct. at 1887–89 (citations omitted).

435. See id. at ___, 132 S. Ct. at 1888–89 (quoting Bankruptcy Reform Act of 1978, Pub.

L. 95-598, 92 Stat. 2565; Bankruptcy Prevention and Consumer Protection Act, Pub. L.

109-8, 119 Stat. 23 (2005)).

436. Id. at ___, 132 S. Ct. at 1893.

437. See id. at ___, 132 S. Ct. at 1893.

438. 455 B.R. 485, 494 (Bankr. E.D. Va. 2011).



Spain, a purported member of the LLC, initiated an action

against another purported member, Thaddeus Williams, as well

as a general contractor of a project on which the LLC had been a

subcontractor, seeking money owed on a construction project and

damages from a multitude of additional claims.439

After Spain,

Williams, and John Sprouse, a third potential member of the

LLC, separately all sought relief under the Bankruptcy Code, the

case was removed to the bankruptcy court.440

Spain later amended

her complaint to ask the court to either disregard the LLC as a

legal entity or to appoint her as liquidating trustee.441

After reviewing the organizational documents of the LLC, the

court found that although the LLC had been properly constituted

under Virginia law, it had not properly named any members un-

der the statutory procedures set forth in Virginia Code section

13.1.442

The court thus looked to extrinsic evidence to determine

the membership of the corporation.443

The court found that alt-

hough Williams and Sprouse had been the original members of

the LLC, Sprouse had transferred his interest to Spain in ex-

change for personal guarantees and capital contributions.444

Un-

der Virginia law, however, an assignment of a membership inter-

est does not automatically entitle the transferee to participate in

the management of an LLC or to exercise any rights of a member;

rather, such an assignment only transfers the right to receive any

share of profits and losses and distributions to which the assignor

would be entitled.445

The court held that while Williams and Spain

each owned fifty percent of the LLC, only Williams was a full

member.446

The court then addressed the proper method for winding up the

affairs of the LLC. Generally, the members of an LLC may wind

up the company’s affairs.447

However, under Virginia Code section

13.1-1040.1(6)(a), “[A] member is dissociated from a limited liabil-

439. Id. at 487–88.

440. Id. at 488.

441. Id. at 489 (footnote omitted).

442. Id. at 494–95 (quoting VA. CODE ANN. § 13.1-1039(A) (Repl. Vol. 2006 & Cum.

Supp. 2010)).

443. Id. at 495.

444. Id. at 497–98.

445. Id. at 498 (quoting VA. CODE ANN. § 13.1-1039(A)).

446. Id.

447. See VA. CODE ANN. § 13.1-1048(B) (Repl. Vol. 2011).



ity company upon . . . [t]he member’s [b]ecoming a debtor in

bankruptcy.”448

While dissociated members retain their rights to

any profits, losses, or distributions from the company, they no

longer possess full membership entitling them to participate in

the management of the company’s affairs.449

As all potential

members of the LLC were in bankruptcy, the court concluded

that, by operation of the Virginia Code, no member of the LLC

was capable of winding up the company’s affairs.450

The court thus elected to appoint a liquidating trustee pursu-

ant to Virginia Code section 13.1-1048(B), which permits “‘the cir-

cuit court of the locality in which the registered office of the lim-

ited liability company is located . . . [to] appoint one or more

liquidating trustees.’”451

The bankruptcy court found that it stood

in the stead of the circuit court by virtue of the notice of removal

and therefore had assumed the powers of the circuit court to ad-

minister the affairs of the company.452

XXI. VALUATION

The court in Gray v. Bank of America, N.A. (In re Gray) consid-

ered motions for default judgment filed in two separate cases to

strip off subordinate deeds from the debtors’ respective homes.453

Although the lenders did not defend the claims and were in de-

fault, the court refused to enter default judgment because of defi-

ciencies in the evidence presented regarding the value of the

properties.454

While the court accepted the amount stated in the proofs of

claim filed by the senior lenders as the balance of the first deed of

trust liens as of the petition date, it took issue with the methods

by which the debtors derived their valuation of the properties.455

One debtor based her valuation on a competitive market analysis

448. Id. § 13.1-1040.1(6)(a) (Repl. Vol. 2011).

449. See id. §§ 13.1-1002, -1040.2 (Repl. Vol. 2011).

450. In re Williams, 455 B.R. at 502 (citing VA. CODE ANN. § 13.1-1048 (Repl. Vol. 2006

& Cum. Supp. 2010)).

451. Id. (quoting VA. CODE ANN. § 13.1-1048(B)).

452. Id. (citing 28 U.S.C. § 1447(a) (2006)).

453. Nos. 09-14445-RGM, 09-14004-RMG, 2010 WL 276179, at *1 (Bankr. E.D. Va.

Jan. 15, 2010).

454. Id.

455. Id.



conducted four months prior to the petition date that did not in-

clude any adjustments to the value based on the nuances of the

debtor’s property and simply listed eleven other properties with

somewhat similar characteristics.456

The second debtor submitted

a printout of an Internet valuation that listed four properties that

the valuation deemed to be “comparable.”457

The printout did not

list any information except the sale price and the number of bed-

rooms and bathrooms and did not provide any indication as to

how the website arrived at the valuation.458

The second debtor al-

so submitted a county tax assessment to bolster the Internet val-

uation.459

The court refused to accept any of the valuations provided by

the debtors.460

With respect to the comparative market analysis,

the court held that it could not rely on the resulting valuation be-

cause of the failure to conduct an actual analysis of the peculiar

features of the debtor’s property.461

The analysis looked at other

purportedly similar properties but failed to make adjustments for

lot size, renovations, condition, or proximity to the debtor’s prop-

erty.462

The court similarly found the Internet valuation and tax

assessments to be wanting because they provided no description

of the methods by which the valuations were reached.463

The court

noted that these valuations generally are based on statistical

models that often do not take into account the specific features of

a property and are therefore unreliable.464

Noting that granting

default judgment is at the discretion of the trial court and is not

an entitlement as a matter of right,465

the court found that the

valuations were insufficiently reliable to support the entry of de-

fault judgment and denied the motions.466

456. Id.

457. Id. at *2.

458. Id. at *2–3.

459. See id. at *3.

460. Id. at *4.

461. Id. at *2 (footnote omitted).

462. Id.

463. Id. at *3.

464. Id. at *4.

465. Id. (citing Ganther v. Ingle 75 F.3d 207, 212 (5th Cir. 1996); Silva v. Madison, 69

F.3d 1368, 1377 (7th Cir. 1995); Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d Cir.

1993)).

466. Id.



In Mitchem v. Branch Banking & Trust Co. (In re Mitchem),

the court was confronted with the question of how to value a

property that, due to the completely unfinished state of the

ground floor, had very few comparable properties from which a

value could be derived.467

The first floor of the debtors’ property

was in the process of being renovated and was, in the court’s

words, an “empty shell[].”468

The traditional comparable market

analysis valuation method, which uses recent sale prices of prop-

erties in a similar area and with similar attributes to determine a

likely value of a particular property, was therefore impractica-

ble.469

The court therefore accepted a substitute methodology by

which the property would be valued by estimating the value of

the property after all repairs and renovations are completed and

then subtracting the value of such renovations.470

467. 455 B.R. 108, 109 (Bankr. W.D. Va. 2011).

468. Id.

469. Id.

470. Id. at 110.

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